A Letter of Credit (LC) is a written undertaking issued by a bank (the issuing bank) on behalf of a buyer (the applicant), promising to pay a seller (the beneficiary) a specified sum of money, provided the seller presents documents that comply strictly with the terms of the LC.
| Party | Role |
|---|---|
| Applicant | The buyer/importer who requests the LC |
| Issuing Bank | The buyer's bank that issues the LC |
| Beneficiary | The seller/exporter who receives payment |
| Advising Bank | The seller's bank that authenticates and advises the LC |
| Confirming Bank | An additional bank (often the advising bank) that adds its own payment undertaking |
Letters of Credit solve the fundamental problem of trust in international trade: the buyer fears paying before receiving goods, while the seller fears shipping goods before receiving payment. The LC places a bank's credit between both parties.
Banks deal in documents, not goods. Payment is triggered by the presentation of conforming documents — not by the physical delivery of goods. This is the bedrock principle established in UCP 600 (Uniform Customs and Practice for Documentary Credits, ICC Publication No. 600).
"Banks examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face to constitute a complying presentation." — UCP 600, Article 14