Complete Letter of Credit (LC) Process: From Opening to Final Payment

Complete Letter of Credit (LC) Process: From Opening to Final PaymentIntroductionA Letter of Credit (LC) is one of the safest payment methods used in international trade. It protects both the exporter and importer by involving banks in the payment process. The buyer gets assurance that goods will be shipped correctly, while the seller gets assurance of payment if all terms are fulfilled.

This blog explains the complete LC process step-by-step in simple language, from the initial purchase order until final payment settlement.

What is a Letter of Credit?

A Letter of Credit (LC) is a written guarantee issued by a bank on behalf of the buyer (importer), promising payment to the seller (exporter) if all terms and documents mentioned in the LC are correctly submitted.

Main Parties Involved in LC

Party Role
Importer / Buyer Purchases goods
Exporter / Seller. Supplies goods
Issuing Bank. Opens LC on behalf of buyer
Advising Bank. Informs exporter about LC
Confirming Bank. Adds payment guarantee (if applicable)
Negotiating Bank. Checks documents and processes payment
Shipping Company. Transports goods
Insurance Company. Provides insurance cover

Types of Letter of Credit

1. Sight LC
Payment is made immediately after documents are accepted.

2. Usance LC
Payment is made after a specified credit period such as 30, 60, or 90 days.

3. Confirmed LC
Another bank guarantees payment in addition to the issuing bank.

4. Transferable LC
The beneficiary can transfer LC benefits to another party.

5. Revolving LC
Used for repeated transactions.

Complete LC Process Step-by-StepStep

1: Sales Agreement Between Buyer and Seller
The importer and exporter finalize:
Product details
QuantityPrice
Delivery terms
Payment terms
LC conditions
A Purchase Order (PO) or sales contract is signed.

Example
An Indian importer agrees to buy machinery from Germany worth USD 50,000 through LC payment.

Step 2: Importer Requests LC Opening

The importer approaches their bank and submits:

LC application form
Import license (if required)
Purchase contract
IEC code
Financial documents
Margin money

The bank checks:
Creditworthiness
Business profile
Transaction risk

Step 3: Issuing Bank Opens LC

After approval, the issuing bank creates the LC mentioning:
Amount
Expiry date
Shipment date
Required documents
Payment terms
Port details
Incoterms

The LC is sent through SWIFT message to the exporter’s bank.

Step 4: Advising Bank Notifies Exporter

The advising bank check:

Verifies authenticity of LC
Advises LC to exporter

Exporter carefully checks:
Product description
Amount
Shipment deadline
Documentation requirements
If any mistake is found, amendment is requested.

Step 5: Exporter Ships Goods

After LC acceptance:
Goods are manufactured or arranged
Shipment is booked
Cargo is dispatched

Shipping company issues transport document such as:
Bill of Lading (B/L)
Airway Bill (AWB)

Step 6: Exporter Prepares Documents

Exporter prepares all required documents mentioned in LC.

Common Documents

Document. Purpose

Commercial Invoice. Goods value details
Packing List. Packaging information
Bill of Lading. Proof of shipment
Certificate of Origin. Country of origin
Insurance Certificate. Insurance proof
Inspection Certificate. Quality verification

Step 7: Documents Submitted to Bank

Exporter submits documents to negotiating/advising bank within the allowed period.The bank checks whether documents comply with LC terms under:

UCP 600 rules
Banking guidelines

Step 8: Document Examination
Banks examine:
Date consistency
Signature correctness
Amount matching
Shipment details
Document completeness

If Documents are Correct -Documents are accepted.

If Discrepancies Found-Bank informs exporter for correction or importer approval.

Common Discrepancies.
Late shipment
Spelling errors
Invoice mismatch
Missing documents

Step 9: Documents Sent to Issuing Bank.

Negotiating bank forwards documents to issuing bank.
Issuing bank rechecks all documents.

Step 10: Payment to Exporter

In Sight LC
Payment is released immediately after document acceptance.

In Usance LC
Payment is made after credit period ends.
Payment is credited to exporter’s account.

Step 11: Importer Receives Documents

Importer receives shipping documents from issuing bank after:
Payment made or
Acceptance under usance LC

Importer uses documents to clear goods from customs.

Step 12: Goods Delivery and Final Settlement

Goods are delivered to importer.
Transaction is completed after:
Bank settlement
Loan adjustment (if any)
Charges recovery
Closure of LC liability

Flow Chart of LC Process

Charges in Letter of Credit

Charge Type. Paid By

LC Opening Charges. Importer
Swift Charges. Usually Importer
Advising Charges. Exporter/Importer
Confirmation Charges. Usually Exporter
Discrepancy Charges. Responsible Party

Advantages of LC

For Exporter:
Payment security
Reduced buyer risk
International trade confidence

For Importer:
Payment only against valid documents
Better trust with suppliers
Controlled transaction process

Risks in LC
Risk. Explanation
Document Discrepancy. Delay in payment
Fraud Risk. Fake documents possible
Country Risk. Political/economic issues
Exchange Rate Risk. Currency fluctuation


Important International Rules

Most LCs follow:
UCP 600 – Uniform Customs and Practice for Documentary Credits.
Issued by International Chamber of Commerce (ICC)

Conclusion,

A Letter of Credit is one of the most reliable payment systems in global trade. It creates trust between buyers and sellers located in different countries. Although the process involves multiple stages and documents, proper understanding of LC operations helps businesses avoid risks and ensure smooth international transactions.
Businesses involved in export-import should understand every stage of LC processing to reduce discrepancies, avoid delays, and improve trade efficiency.


The above mentioned information is only for educational purposes.