How Does a Letter of Credit Work? From Purchase Order to Payment
The step-by-step flow of a Letter of Credit transaction, from sales contract to bank payment.
Reviewed by LCCheck team (owner-approved) · 2026-10-12
Short answer
A Letter of Credit works in stages: the buyer and seller agree to use one; the buyer's bank issues it; the seller's bank advises it; the seller ships and prepares documents; the documents are presented to the bank; the bank examines them within five banking days and, if they comply, pays or commits to pay.
| Examination time | Up to five banking days (Art. 14(b)) |
|---|---|
| Default presentation period | 21 days after shipment, within expiry (Art. 14(c)) |
| Payment types | Sight, deferred payment, acceptance, negotiation |
Step by step
- Sales contract agrees payment by Letter of Credit.
- Buyer applies to its bank; issuing bank sends an MT700.
- Advising bank checks authenticity and passes it to the seller.
- Seller reviews terms and requests amendments if needed.
- Seller ships and collects documents.
- Seller presents documents to the nominated bank.
- Bank examines documents and pays, accepts or refuses.
- Issuing bank reimburses and releases documents to the buyer.
Where things go wrong
Most problems arise in the document stage: late shipment, late presentation or inconsistent data. Reviewing the credit early and checking documents before presentation prevents most of them.
Sources
- ICC — UCP 600 (Uniform Customs and Practice for Documentary Credits)
- US International Trade Administration — Letters of Credit
General guidance, not legal advice. Your bank examines documents independently.
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