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Required documents

ABOUT Letter of Credit

A letter of credit is a document that a financial institution or similar party issues to a seller of goods or services which provides that the issuer of such credit will pay the seller for goods or services sold to the buyer. The issuer then seeks reimbursement from the buyer or from the buyer’s bank. The document serves essentially as a guarantee to the seller regardless of whether the buyer ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred from the seller to the letter of credit’s issuer.

Letters of credit are used primarily in international trade for large transactions between a supplier in one country and a customer in another. The Basic objective of Letter of Credit is to facilitate orderly movement of trade which makes it necessary that the evidence of movement of goods is present. Banks are not connected with the quality / quantity of the good. The Letter of Credit is for inland and foreign transactions.


Any individual or any sovereign entity carrying out international trade is eligible for taking letter of credit.

Required Documents

The documents needed vary from case to case. Let FINMART understand your needs and assist you in documents requirement.


As per the agreed terms between buyer and seller, the period of credit is decided. Based on such period of credit, the time to effect payment by opening bank (buyer’s bank) is determined.
There are 4 types of Letter of Credit:
  1. Revolving Letter of Credit
  2. Back to Back LC
  3. Revocable LC
  4. Irrevocable LC
Revolving Letter of Credit is used when the delivery of goods is in form of partial/ multiple shipments. Revolving Letter of Credit keeps on revolving and is not restricted to a single transaction. Revolving Letter of Credit (LC) can be utilized for subsequent business transactions over a period of time on a continuous basis to the extent of limit sanctioned.

The seller/buyer does not have to go to the bank for sanction of fresh limits every time he gets a new order for executing the same.
Back to Back Letter of Credit is generally used by the middleman or agencies to hide the identity of the real suppliers or manufacturers. The seller can utilize this Back to back Letter of Credit as a security for his bank, to issue a back to back Letter of Credit in “favour of his suppliers" in order to get a very competitive rate for his purchases and increase his profit margin in the process. Thus this can very well be used by the seller to raise quick funds and complete his orders in the scheduled time.

Such transactions originate when a seller receives a letter of credit covering goods which must be obtained from a third party who in turn requires a letter of credit. The “second" issuing bank looks to the first issuing bank for reimbursement after paying under the second letter of credit.
Revocable Letter of Credit means the payment against this L/C can be revoked by the issuing bank. The buyer may either amend the Letter of Credit or cancel it without the approval of the seller. The payment against Revocable Letter of Credit is not for sure and hence this type of Letter of Credit is not commonly used.
Irrevocable Letter of Credit cannot be cancelled. This seller is assured of payment for his supply of goods/services provided all terms and conditions of L/C are conformed to. This mode of payment is generally used in international trade transactions.

As the payment against this Irrevocable Letter of Credit is guaranteed by the issuing bank and the holder of this Irrevocable Letter of Credit (seller) can borrow short term finance from any other bank or lending institution at a very low rate of interest and within a very short time.

Sight LC:
It is a kind of credit that the announcer bank after observing the carriage documents from the seller and checking all the documents immediately pays the required money.

Opening a Letter of Credit at sight is common practice in the export business. Under sight LC, the payment of export proceeds sent to seller’s bank by buyer’s bank immediately upon receipt of original shipping documents as per the terms and conditions mentioned on LC.

  • Once after completion of export customs clearance procedures, the exporter prepares all required documents as per the terms and conditions of letter of credit.
  • These documents will be submitted with exporter’s bank, along with the original LC.
  • Bank verifies all documents and make sure, the documentation is in order as per LC conditions.
  • These documents will be sent to buyer’s bank and in turn to the buyer after necessary approval in documentation by seller’s bank.
  • Once the buyer’s bank receives the documents, the export sales amount as per the said documents will be sent to exporter’s bank.
  • However, the documentation of each consignment must be as per the conditions of LC at sight and the buyer’s bank has the right to reject payment on any violation of such documentation.

The credit period of LC can be determined my mutually agreed terms and condition by buyer and seller before sales takes place.

Some time, the foreign buyer may demand credit period of 30 days, 60 days, 90 days, 120 days etc. However as per government regulation, the total period of credit should not exceed more than 180 days.

Normally the credit period is calculated from the date of shipment.  The date of shipment is determined on the basis of date of bill of lading or airway bill.

Under LC, bank is guaranteeing the payment.  So a margin amount is blocked in your bank account to make the payment under the said letter of credit. The amount of margin is determined on the basis of the credibility between clients and bank.

The margin amount can range anything between 1% to 100%, of the amount of LC.
While accepting a LC, the supplier guarantees to meet the terms and conditions of letter of credit with documentary proof. This is one of the major advantages of LC to an importer/buyer. This assurance provides security to buyer for future business plan.
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