How does Letter of Credit work?


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Mechanism of Letter of Credit


LC is a common term used in all trade.    When talking of LC, there may have many questions among traders. What is Letter of Credit? How does Letter of Credit work? How many types of LC are there? How do these types of Letter of Credit work? Which type of Letter of credit is safe for Exporter?  Which type of LC is safe for Importer? How to provide credit period to buyer under Letter of Credit? Can we get my products immediately up on shipping goods under Letter of Credit?


How does Letter of Credit work copy

What is Letter of Credit?


Letter of credit is an assurance given by the buyer’s bank to remit the amount to the seller through seller’s bank on maturity, as per the terms and conditions of document based on the contractual agreement between buyer and seller. Now in simple words, If LC opened on your name as beneficiary, you will receive amount though the buyer’s bank (opening bank)  on the agreed time. All Letters of Credit for export import trade is handled under the guidelines of Uniform Customs and Pracice of Documentary Credit of International Chamber of Commerce (UCP 600).  I know, the above explenation about Letter of Credit is not perfect. So I request you to read all articles about Letter of Credit in this web blog. 

There are various types of letters of credit like Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back etc. Most common and safe LC is Irrevocable Letter of Credit for both buyer and seller.


You can go through details about all types of LC in another article in same website.  Also written a seperate artilce about parties involved in Letter of credit.


When can exporter get money under LC?

As per the agreed terms between buyer and seller, the period of credit is decided. Based on such period of credit,  the time to effect payment by opening bank (buyer’s bank) is determined.


What is Sight LC and how does LC at sight work?


Now let us discuss the mechanism of working LC at sight.  How does sight letter of credit work?


Procedures to get money under Letter of Credit at sight.


Opening a Letter of Credit at sight is common practice in the export business. Under sight LC, the payment of export proceeds sent to seller’s bank by buyer’s bank immediately up on receipt of original shipping documents as per the terms and conditions mentioned on LC.


Once after completion of export customs clearance procedures, the exporter prepares all required documents as per the terms and conditions of letter of credit. These documents will be submitted with exporter’s bank, along with the original LC. Bank verifies all documents and make sure, the documentation is in order as per LC conditions. These documents will be sent to buyer’s bank and in turn to the buyer after necessary approval in documentation by seller’s bank. Once the buyer’s bank receives the documents, the export sales amount as per the said documents will be sent to exporter’s bank.   However, the documentation of each consignment must be as per the conditions of LC at sight and the buyer’s bank has the right to reject payment on any violation of such documentation.  This is the procedures under letter of credit at sight.

  How long is the Credit period under Letter of Credit:

 The credit period of LC can be determined my mutually agreed terms and condition by buyer and seller before sales takes place.


Some time, the foreign buyer may demand credit period of  30 days, 60 days, 90 days, 120 days etc. However as per government regulation, the total period of credit should not exceed more than 180 days.


Normally the credit period is calculated from the date of shipment.  The date of shipment is determined on the basis of date of bill of lading or airway bill.  You can alread read about how to open a Letter of Credit in this web blog about international business.


You can also read more information by clicking   What are the advantages of Letter of Credit to Exporter? How LC is benefited to Importer?   Are there any disadvantages to importer for a consignment under Letter of Credit?   What are the disadvantages of LC to an exporter?   Who are the parties involved in Letter of Credit?   How to check authenticity of LC? What is Prime Banker?  Yes, I am sure, once after going through that articles you will have a good knowledge about Letter of Credit.


I hope, I have explained about the mechanism of Letter of Credit.


The above information is a part of Export import business Course online

Share your experience and thoughts about Letter of Credit below:

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Saubhagya Kumar Kar: The articles on different aspects of export-import trade is very vital and useful for the beginners those who have no prior knowledge in this subject.It is being very useful for me.Many Many thanks to you.

CA.Dinesh: I thank vrymuch..greatwork,, it will help greatly..such piece art is shown rarely,, thanks again

Denny John: Excellent articles sir. Everybody can clear the doubts with this articles.Thanks a lot...

Vishal: Dear sir, Could you please explain me one thing. If buyer is giving LC to seller, and buyer is giving 180days period and in that 135 days will be bear by buyer and 45 days will be bear by seller. In such case, when the seller get the money through bank and who will bear the discounting charges. It would really help me if you will suggest. Thanks in Advance

sonam: Sir can u explain the documentation takes place for opening the lc & clauses of LC and what is the difference between LC & buyers credit, which one good for importer. which type of work involve for importing goods to their clearance

Mythree Silva: Thanks lot to job is verry help full for me upgrade my carrier thanks again....

Abbas: Thnanks for such a great description. in case i exported goods to my foreigner buyer on an agreement of Sight LC, and unfortunately the material got rejected, So will it effect my payment or can he block my payment. KINDLY EXPLAIN...

Muhammad Naveed Kazmi: Thank you very much for all of them who tried their best and provide the detail & information of letter of credit. I hope I will be better deal with these best suggestions. once again thank you very much.

Muhammad Naveed Kazmi: Thank you very much for all of them who tried their best and provide the detail & information of letter of credit. I hope I will be better deal with these best suggestions. once again thank you very much.

Muhammad Naveed Kazmi: I Think these articles about letter of credit is very useful for those people who are beginners and want to start their business import or export. Letter of credit is very useful criteria which safe you money and I congratulate all the people who wrote these articles and provide us useful details and information. once again thank you very much.

Muhammad Naveed Kazmi: Thank you very much for all of them who tried their best and provide the detail & information of letter of credit. I hope I will be better deal with these best suggestions. once again thank you very much.

P.Krishnamoorthy: Dear Sir, Hearty congratulations SUCH A WONDERFUL DIAMOND ARTICLES, Thank you very much...... I am in the field for the past 13 years, Never seen this kind of explanations from websites.

hossein shariati: I appreciate for important information shared with us and thank you very much they are very useful and simple to understand please continue,

S. Saravana Bhavan: Thanks for your valuable & informative details abour LC given in your articles. Also it is very easy to understand clearly about the details provided.

Musthag: These informative articles published by has surely invested so much into my knowledge. Thanks to all the brainy minds involved in this informative group.

Mahendra choudhary : These information are very useful those who are importing & exporting first time. i have got much information from these articless Thank you very much.

Samer: Dear Sir IS there any provision if seller cheat in sending other goods or anything-else instead of that order placed. Regards Sameer


Manikandaselvam: Thanks for the information

kumar satyaveer: The above articles are very significant.It has cleared all my doubts and queries. Thanking you for posting these informative articles. Regards Kumar Satyaveer

NINAD: Very good information and easy to understand. Thanks to the writers.

saubhagya kumar kar: Dear Sir, suppose , I am an exporter of a particular good. The buyer in a different country opened a letter of credit in my name In a year I shall send 5 shipments.In the first shipment when I will produce the documents to the bank, You have written that the original lc will be produced to my bank.If in one shipment the lc will be produced for next shipments how it could be possible to produce the original lc. please elaborately explain to me.

Admin: saubhagya kumar kar, Original LC can be produced with bank and you can take it back after verifying by producing a copy of Letter of Credit if more than one shipment occurs under an LC

Shwaki: Dear, sirs I have some miss understand for the short cut in the LC CIF, CPT, CFR, FOB, CIP, FCA ....etc

NASRAO: we wish to operate lcs for within the country operations and secure customer payments thus. please guide us.

OMOYENI Patrick Olu : I appreciate the people in the admin, I read this with deep understanding. I am an exporter from Nigeria. I export all agricultural products. Pls I need buyers from any part of the world. Visit Thanks

Vishal: Hi, my buyer wants L/C FOB payment for perishable fruits to Dubai. Should i accept L/C payment method? Secondly, any risks associated with L/C. Thanks, Vishal.

RUKSHAR KHAN: DEAR SIR YOU TOLD THAT THERE ARE VARIOUS TYPES OF LETTER OF CREDIT LIKE Revocable, Irrevocable, Confirmed, Unconfirmed, Clean & Documentary, Fixed, Revolving, Transferable, Back to Back etc.CAN YOU PLEASE EXPLAIN IT.

Prabir Maitra: Dear sir, we get enlighten the payment term : 70% in 7 days after delivery of material and30% after 120 days of delivery of material through Irrevocable uncofirmed Lc. Please elaborate how the LC will work.


dharmendra: Hi All, I am a common person and u want to import some metals from China to India. In this we will pay 30% amount as t/t and the balance against the copy of BL through LC. What kind of securities for importer in this situation? Deos 70% amount of LC against the B/L is secure for us? What kind of risks in this payment method? Please reply as soon as possible.

Rajiv: Hi all. By any chance, will 42D(Drawee name and address) and 42A(Drawee) appear in the same LC?

Yash Goyal : I want to know about the license formalities of export and import license and what is the process of applying a license and Its Fees. I want to consultant about the business which business would be the best business of export and import.

Aditya jha: Dear Sir, I want to know that incase l.c has opend & material has also dispatched but in transit a few bags of material has damaged and buyer returned to supplier.then what will be effect on l.c and tax invoice which we have already submitted to bank. please clearify....

Premraj : I am premraj from Tirupur, Tamilnadu.I am just a beginner of export business..your site articles are very helpful to that.Now i named my business and blocked the domain etc..Which bank is best for current A/c? is it only a nationalized banks or icici bank also eligible? if icici bank is not eligible what is the reason? kindly refer this to me and help me.

Abdul Khan : I have still more doubts on open lc and closed lc. riv vocable and irr vocable lc. can trader open lc.

Riyaz: What is the beneficiary certificate, which is ordered by the L.C issuing bank and it is provided by the beneficiary in LC with other documents? What is its format and content? Please help me about it, my email

Md.Khalidur Rahman (Shipon): Thanks For The Information

Arshad Hussain: Very useful site. Thanks

SubbaraoM : Sir I am exporting goods to South Korea is it possible to encash before LC

Shareeque Hussainy: Need more brief explanation step by step on LC process.

stanley opara: Please I need your assistance on a shipment under LC. According to the carrier, OBL is stocked somewhere owing to Lockdown and cargo needs to be released at destination port. Now could you explain to me if cargo can be released with delivery order and if the 3 sets of OBL can be surrendered at load port after the lockdown.


Rajinder: Dear sir we are merchandise exporters importers having valid license from different departments of government of India. Our buyers are ready to issue LC. To make advance payment to the manufacturer, we would like to transfer the LC as packing credit. You are requested to kindly help us by advising your product which can be helpful for the packing credit. Thanks

ezas: we A received a order from M , Oman to buy material from India with there registered suppliers and A received LC from Sriram EPC. A has issued a LC from Bank Nizwa to Suppliers in India. As per the normal conditions Consignor will be first party and Consignee / Notify party will be A to the Account of Bank Nizwa. As per the agreement between M & A stating B/L should be mentioned Bank Sohar i.e, LC received by A is issued from Bank Sohar by Sriram EPC. Attached Sample B/L and Commercial Invoice for your reference. So please let us know how to proceed this transaction.

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