Documentary Letter of Credit

What is a documentary letter of credit?

A documentary letter of credit (DLC or LC) is a conditional payment undertaking issued by a bank at the request of an applicant (buyer), in favour of a beneficiary (seller). The bank agrees to pay a specified amount provided the beneficiary presents documents that strictly comply with the terms and conditions of the credit.

Letters of credit are governed primarily by the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce. They are one of the most widely used instruments in international trade finance.

Types of documentary credits

• Sight letter of credit — payment is made immediately upon presentation of compliant documents.
• Usance (deferred) letter of credit — payment is made at a future date after document presentation, typically 30, 60, 90 or 180 days, providing working capital flexibility to the buyer.
• Transferable letter of credit — allows the original beneficiary to transfer all or part of the credit to a secondary beneficiary, common in intermediary trade.
• Confirmed letter of credit — a second bank adds its own payment undertaking, reducing country and bank risk for the beneficiary.

How it works

The applicant and beneficiary agree commercial terms. The applicant instructs its bank to issue an LC in favour of the beneficiary. The issuing bank transmits the credit via SWIFT (typically MT700). The beneficiary ships goods and presents documents to the nominated or confirming bank. If documents comply, payment is made according to the credit terms.

Typical use cases

• Import/export transactions where the seller requires payment assurance before shipment
• Commodity trades with documentary presentation requirements
• Cross-border supply contracts with unfamiliar counterparties
• Transactions requiring alignment between shipment, insurance and payment documents

How Commercial Trade Group supports LC transactions

We review LC requests, coordinate draft instrument wording, assess execution routes through our institutional network and support the documentary process from application through to SWIFT issuance. All matters are subject to due diligence, documentation review and applicable regulatory requirements.