Payment Terms
Letter of Credit Explained: How L/C Payments Work in International Trade
5 min read
An L/C is the backbone of large commodity payments. Here is how irrevocable and at-sight Letters of Credit work, and the documents they usually call for.
What Is a Letter of Credit?
A Letter of Credit, commonly called an L/C, is a banking instrument frequently used to facilitate payment in international trade.
The buyer's bank issues the L/C in favour of the seller according to agreed commercial conditions.
The seller must then present the required documents in accordance with the Letter of Credit before payment can be made.
What Is an Irrevocable Letter of Credit?
An irrevocable Letter of Credit generally cannot be changed or cancelled without the agreement of the relevant parties.
This can provide greater certainty to both buyer and seller compared with less structured payment arrangements.
What Does L/C at Sight Mean?
An L/C at sight generally means that payment is made after compliant documents have been presented and accepted under the Letter of Credit.
Common documents may include:
- Commercial Invoice
- Packing List
- Bill of Lading
- Certificate of Origin
- Inspection Certificate
- Insurance Documents
- Health or Phytosanitary Certificate
- Halal Certificate where applicable
- Certificate of Analysis
The documents required depend on the commodity and destination market.
Why Do Commodity Buyers Use Letters of Credit?
International commodity transactions can involve substantial values and counterparties located in different countries.
An L/C provides a structured banking mechanism between buyer and seller. It is commonly seen in trades involving:
- Wheat
- Rice
- Lentils
- Sugar
- Edible Oils
- Meat
- Fertiliser
- Copper
- Aluminium
- Petroleum Products
What Should Buyers Check?
Before opening an L/C, the buyer should carefully review:
- Product specification
- Quantity
- Price
- Incoterm
- Shipment period
- Inspection terms
- Document requirements
- Banking details
The L/C should reflect the agreed commercial contract.
What Should Sellers Check?
Sellers should review the Letter of Credit before shipment to ensure the documentary requirements can realistically be met.
Even a small discrepancy in shipping documents may create delays.
Final Thoughts
Letters of Credit remain an important payment tool in global commodity trading.
Successful L/C transactions depend on clear commercial terms, accurate documentation and coordination between the buyer, seller, banks, freight providers and inspection companies.