What Is a Letter of Credit? A Practical Guide for Exporters
A plain-language explanation of a Letter of Credit, the parties involved, and why exporters use one.
Reviewed by LCCheck team (owner-approved) · 2026-10-12
Short answer
A Letter of Credit is a bank's undertaking to pay the seller (beneficiary) when the seller presents documents that comply with the credit's terms. It replaces the buyer's credit risk with the issuing bank's, but only for documents: the bank pays against compliant paperwork, not against the goods themselves.
| Rulebook | Usually UCP 600 |
|---|---|
| Who pays | Issuing bank (and confirming bank, if any) |
| Paid against | Compliant documents, not goods (Art. 5) |
| Common message | SWIFT MT700 |
The parties
- Applicant — the buyer who asks for the credit.
- Issuing bank — the buyer's bank that gives the undertaking.
- Beneficiary — the seller who is paid.
- Advising bank — passes the credit to the seller.
- Confirming bank — optionally adds its own undertaking.
Why exporters use one
It reduces the risk that a buyer will not pay, especially with new buyers or distant markets. The protection only works if the seller can present compliant documents on time.
What the exporter must do
- Check the credit's terms as soon as it arrives.
- Ask for amendments to anything that cannot be met.
- Ship within the latest shipment date.
- Present compliant documents before the deadline and expiry.
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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