The parties
- Applicant: the buyer, who asks its bank to issue the credit.
- Issuing bank: the buyer's bank, which gives the payment undertaking.
- Beneficiary: the seller, who will be paid against documents.
- Advising / confirming bank: a bank in the seller's country that passes on the credit and may add its own guarantee (confirmation).
How a transaction flows
The buyer applies for the LC; the issuing bank opens it in the seller's favour and sends it through the advising bank. The seller ships the cargo, assembles the required documents and presents them. If the documents comply with the credit, the bank pays, regardless of any dispute about the goods themselves. This independence is the principle that makes the LC reliable for both sides.
Documents and compliance
Payment turns on strict compliance: a discrepancy as small as a mismatched description can delay or block payment. Typical documents include the commercial invoice, the bill of lading and quality and quantity certificates. See what documents are used in a crude oil transaction.
The UCP 600 rules
Most commercial letters of credit incorporate the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce. UCP 600 sets common definitions, bank obligations and document-examination standards so that a credit means the same thing across jurisdictions.
Sources & references
This article paraphrases widely established facts from the organisations below. It does not reproduce their text. Always confirm current figures against the primary source.
- International Chamber of Commerce (ICC) — UCP 600 (Uniform Customs and Practice for Documentary Credits)