What is a Letter of Credit (L/C)?

What is a Letter of Credit (L/C)?

A Letter of Credit (L/C) is a conditional payment commitment issued by a bank on behalf of the buyer (importer), guaranteeing that the seller (exporter) will receive payment once the required shipping documents are provided in full compliance with the terms and conditions specified in the credit.

In simpler terms, a Letter of Credit acts as a financial guarantee from the bank, ensuring trust and security between trading partners — especially in international trade where parties may not know or fully trust each other.

Example:
A Vietnamese company importing goods from China may request its domestic bank to open an L/C in favor of the Chinese supplier. Once the seller ships the goods and submits all required documents (invoice, bill of lading, CO, CQ, etc.), the bank will release the payment as stated in the L/C.

Key Features of a Letter of Credit

Key Features of a Letter of Credit

• Independence from the sales contract: The L/C is a separate transaction from the underlying sales contract. The bank does not involve itself in commercial disputes.
• Document-based payment: The bank only examines documents, not goods. Payment is made only if all documents conform exactly to the L/C terms (“Payment against documents”).
• Conditional commitment: The bank’s obligation to pay arises only when the seller presents compliant documents.
• International standardization: Governed by UCP 600 (Uniform Customs and Practice for Documentary Credits) issued by the ICC (International Chamber of Commerce) — ensuring consistency in global trade transactions.

Common Types of Letters of Credit

Under international practice, if an L/C does not explicitly state “revocable,” it is automatically treated as irrevocable.

>> Read More: What is TTR Payment (Telegraphic Transfer Reimbursement)?

Benefits of Using Letters of Credit

For Exporters:

• Assured payment: Once compliant documents are submitted, the bank is obligated to pay.
• Reduced payment risk: Not dependent on the buyer’s willingness or ability to pay.
• L/C discounting available: Exporters can use an L/C as collateral for working capital.
• Timely payment: Payment is made as scheduled — whether at sight or on a deferred basis.

For Importers:

• Payment only upon shipment: Reduces the risk of paying for undelivered goods.
• Control over shipping terms: L/C conditions require the seller to comply strictly with delivery standards.
• Enhanced credibility: Demonstrates financial capacity and reliability to trading partners.

Risks and Considerations When Using L/Cs

Main Contents of a Letter of Credit Sample

Main Contents of a Letter of Credit Sample

• Reference number, issue date, and place of issuance.
• Type of L/C (Irrevocable, Confirmed, Revolving, Transferable, etc.).
• Details of involved parties: Applicant (Buyer), Beneficiary (Seller), Issuing Bank, Advising Bank.
• Amount and currency of the credit.
• Validity and presentation period.
• Shipping terms (Incoterms, ports, and transport mode).
• Commodity details: description, quantity, weight, packaging.
• Required documents: Commercial Invoice, Bill of Lading, Certificate of Origin, Insurance Certificate, Packing List, etc.
• Bank’s payment undertaking.
• Bank charges, dispute resolution, and transferability clauses.

>> Read More: Cargo Insurance Conditions for Import and Export  

Six-Step L/C Payment Process

L/C Payment Process

1. The buyer requests the issuing bank to open an L/C according to the sales contract.

2. The issuing bank sends the L/C to the seller’s bank (Advising Bank).

3. The advising bank verifies and forwards the L/C to the seller.

4. Seller ships goods, prepares documents as per L/C terms, and submits them to the advising bank.

5. Advising bank checks and forwards documents to the issuing bank.

6. Issuing bank reviews the documents:

• If compliant → Payment is released to the seller.
• If discrepancies exist → Buyer’s acceptance is required; otherwise, payment is declined.

In some cases, additional banks may be involved, such as a Confirming Bank, Negotiating Bank, or Reimbursing Bank, depending on the type of L/C used.

Partner with KFLV for Shipping Support

At King Freight Logistics Vietnam (KFLV), we assist import-export companies in handling international shipments safely, on time, and in full compliance with Letter of Credit (L/C) documentation requirements.

Our team has extensive experience in reviewing transport documents, coordinating with banks and carriers to ensure smooth shipment and payment processing.

We offer:

• Verification of shipping documents to meet L/C requirements.
• Monitoring booking progress and document submission timelines.
• Transparent, on-time international freight services.
• End-to-end support for your logistics and L/C-related operations.

If your business is engaged in international trade using L/C payments and needs a trusted logistics partner, contact KFLV at +84 (0) 938 188 796 or cs1@hcm.kfkingfreight.com for detailed support.