Letter of credit
LC, documentary credit
A letter of credit is an undertaking by the buyer's bank to pay the seller once the seller presents documents that comply exactly with the credit's terms, substituting the bank's creditworthiness for the buyer's.
It solves the fundamental problem of trading with a stranger across a border: the seller does not want to ship before payment and the buyer does not want to pay before shipment. The bank stands between them and pays against documents rather than against goods.
That last point is the one that costs exporters money. Banks examine documents, not shipments. If the bill of lading says one thing and the credit says another — a spelling, a date, a description that does not match word for word — the presentation is discrepant and the bank may refuse to pay even though the goods arrived perfectly.
Credits are frequently drawn down in parts against partial shipments, so knowing how much of a given LC remains available, and by when, is a live figure rather than a filing detail.
Key facts
- Governed by the ICC's UCP 600 rules where the credit says so.
- Payment is against compliant documents, not against delivery of goods.
- An irrevocable credit cannot be amended without all parties' agreement.
- A confirmed credit adds a second bank's undertaking, covering country and bank risk.
- Documentary discrepancies are the most common cause of delayed payment.
Who this affects
Exporters and importers trading on documentary credit terms.
How YarnTally handles it
Letters of credit and their drawdowns are tracked with automatic recomputation of the remaining balance, and expiry feeds the compliance deadline list.
See what else it doesReviewed September 2026. This is general information about how these rules work, not tax or legal advice, and thresholds and due dates do change. Check your own position with your chartered accountant before acting on it.