A written guarantee from a bank (on behalf of the buyer) promising payment to the seller upon presentation of specified documents proving shipment of goods.
A Letter of Credit (LC or Documentary Credit) is a trade finance instrument governed by UCP 600 (Uniform Customs and Practice for Documentary Credits) issued by the International Chamber of Commerce. It provides security to both parties: the seller is assured of payment if documents comply with LC terms, and the buyer is assured that payment is made only after proof of shipment. The process involves: buyer (applicant) requests LC from their bank (issuing bank), which sends it to the seller's bank (advising/confirming bank). After shipping, the seller presents documents (bill of lading, commercial invoice, packing list, insurance, etc.) to their bank for payment. Types include: sight LC (immediate payment), usance LC (deferred payment), revolving LC, transferable LC, and standby LC. In India, LCs are widely used for both domestic and international trade.
Indian buyer orders $50,000 of goods from a Chinese supplier. Buyer's bank issues an irrevocable sight LC for $50,000. Supplier ships goods, obtains bill of lading, and presents documents to their bank. Documents are verified against LC terms. Payment of $50,000 is released to supplier within 5 working days. Buyer's bank debits the buyer and releases documents to collect goods from port.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
LC is a primary payment obligation — the bank pays the seller on behalf of the buyer. Bank guarantee is a secondary obligation — the bank pays only if the buyer defaults on their obligation. LC is used for trade transactions; bank guarantees are used for performance assurance, bid bonds, and advance payment security.
The bank can reject documents with discrepancies (even minor ones like typos in LC number). The seller then has options: correct and re-present, request buyer to accept discrepancies, or negotiate under reserve. About 60–70% of first presentations have discrepancies — careful document preparation is critical.
A periodic document issued by a bank summarizing all transactions (deposits, withdrawals, fees, interest) in an account over a specific period.
A formal document issued by a buyer to a seller specifying the types, quantities, prices, and terms of products or services to be purchased.
The transfer of money from one party to another, particularly the sending of funds by foreign workers to their home countries or cross-border business payments.
The management of a company's financial assets, liabilities, cash flows, and financial risks to ensure liquidity, optimize returns, and minimize risk exposure.
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