Letter of Credit FAQ

A deferred payment LC is a type of usance (time) LC where the bank commits to pay the beneficiary on a specified future date rather than immediately upon presentation of documents. Unlike an acceptance LC, there is no bill of exchange (draft) drawn — payment is deferred by a fixed period such as 90 or 180 days from the bill of lading date or from the date of presentation. This structure effectively gives the buyer a period of credit while still giving the exporter a bank payment commitment. Under UCP 600 Article 2, deferred payment is one of the four defined methods of honour. The risk for the exporter is that the payment obligation is unsecured during the deferral period, which is why confirmation of a deferred payment LC by a bank in the exporter's country is often recommended for higher-risk transactions.

A restricted LC (also called a straight LC) designates a specific nominated bank through which documents must be presented and through which the LC can be negotiated or paid. The exporter can only use that particular bank. This is specified in Field 41D of the MT700. An unrestricted LC (also called a freely negotiable LC) allows the beneficiary to present documents to any bank willing to negotiate — there is no restriction on which bank the exporter uses. Freely negotiable LCs give exporters more flexibility and are common in many trade corridors. Restricted LCs give the issuing bank more control over the transaction and are often seen where the nominated bank has a specific relationship with the issuing bank. Under UCP 600 Article 6, an LC must state the bank with which it is available or state it is available with any bank.

An unconfirmed LC is one where only the issuing bank (the buyer's bank) has given a payment undertaking. There is no second bank adding its own guarantee. The exporter is relying solely on the issuing bank's creditworthiness and the political and economic stability of the buyer's country. Most LCs are unconfirmed. By contrast, a confirmed LC has a second bank — usually in the exporter's country — adding its own independent payment commitment on top of the issuing bank's. Exporters trading with buyers in higher-risk countries, or where the issuing bank is not internationally recognised, should consider requesting confirmation. Confirmation is specified in Field 49 of the MT700 and adds cost, typically 0.1–0.5% of the LC value.

A transferable LC allows the original beneficiary (the first beneficiary, usually a trading house or intermediary) to transfer part or all of the LC to one or more secondary beneficiaries, typically the actual manufacturer or supplier of the goods. This is useful when the exporter is acting as a middleman and needs to pay their own supplier using the buyer's LC. Under UCP 600 Article 38, an LC is only transferable if it is expressly marked as 'transferable' by the issuing bank. The LC can only be transferred once — a secondary beneficiary cannot transfer it further. The transferring bank has no obligation to effect a transfer unless it agrees to do so. Key terms such as amount, unit price, expiry date, and shipment date can be reduced or brought forward in the transfer.

A back-to-back LC is a structure where an intermediary (trading company) uses an LC received from their buyer as security to obtain a second, separate LC issued in favour of their own supplier. Unlike a transferable LC, the two LCs are legally independent instruments — the supplier's LC is issued by a different bank against the security of the master LC. Back-to-back LCs are more complex and involve more bank risk than transferable LCs, so banks are often reluctant to issue them. The intermediary bears the risk that the documents under the two LCs are consistent and that payment timing aligns. This structure is common in commodity trading and where the buyer's LC cannot be made transferable.

A standby LC is a guarantee instrument rather than a primary payment mechanism. It is only drawn upon if the applicant (buyer or contractor) fails to meet their obligation — it acts as a safety net rather than the expected payment route. Standby LCs are widely used in project finance, construction contracts, and service agreements where the parties expect to settle by other means but want a bank guarantee as a backstop. They are governed by either UCP 600 or ISP98 (International Standby Practices). Unlike a documentary LC where the beneficiary presents shipping documents, a standby LC typically requires only a simple written demand or statement of default to trigger payment. Standby LCs are functionally similar to bank guarantees.

A red clause LC (historically written in red ink) allows the issuing or nominated bank to make advance payments to the beneficiary before shipment and before any documents are presented. The advance is effectively an unsecured pre-shipment loan from the buyer to the seller, made through the banking system. The advance is deducted from the final LC payment when documents are presented. Red clause LCs are used where the seller needs financing to produce or procure the goods before shipment — common in commodity trades such as wool, cotton, and agricultural products. The buyer carries the risk that the seller may fail to ship after receiving the advance. A green clause LC is similar but requires the beneficiary to warehouse goods as security for the advance.

Field 57A (Advise Through Bank) in an MT700 specifies the bank through which the LC is advised to the beneficiary — the advising bank. This is usually a bank in the exporter's country that has a correspondent relationship with the issuing bank. The advising bank's role is to authenticate the LC and pass it on to the beneficiary. It does not add a payment commitment unless it also confirms the LC (Field 49). The advising bank charges a fee for its service, typically deducted from the LC proceeds or charged separately. If no advising bank is specified in Field 57A, the issuing bank may advise the LC directly to the beneficiary or select an advising bank of its own choice.

Field 46A (Documents Required) is one of the most critical fields in an MT700 Letter of Credit. It lists every document the beneficiary must present to obtain payment. Each entry should specify the exact document name, the number of originals and copies required, and any specific wording, certification, or endorsement needed. Common documents listed in Field 46A include the commercial invoice, bill of lading or transport document, insurance certificate or policy, certificate of origin, packing list, and beneficiary certificates. Vague descriptions such as 'documents as per contract' are not acceptable under UCP 600 and create discrepancy risk. Every requirement in Field 46A should be specific, measurable, and achievable by the exporter before the LC is agreed.

Field 47A (Additional Conditions) contains any requirements beyond the standard document list in Field 46A. Examples include a requirement that the invoice must show a specific purchase order number, that goods must be shipped in refrigerated containers, or that a pre-shipment inspection certificate from a named inspection company must be presented. Additional conditions increase compliance complexity and discrepancy risk. Best practice is to use Field 47A sparingly and only for genuinely necessary requirements that are clearly worded and measurable. Exporters should review every condition in Field 47A carefully before accepting the LC to ensure they can satisfy each one. Conditions that are ambiguous or impossible to comply with should be amended before shipment.

Field 41D (Available With / By) specifies two things: which bank the LC is available with (the nominated bank), and the method of payment (sight payment, deferred payment, acceptance, or negotiation). A freely negotiable LC states 'any bank' in this field. A restricted LC names a specific bank. The method of payment determines when and how the exporter gets paid: sight payment means immediate payment upon complying document presentation; deferred payment specifies a future payment date; acceptance means a bill of exchange is accepted by the bank for payment at maturity; negotiation means the nominated bank purchases the documents and draft from the beneficiary.

Field 44C is the Latest Date of Shipment — the last date by which goods must be shipped (the on-board date on the bill of lading must be on or before this date). Field 44D is the Shipment Period, an alternative way to specify when shipment must occur using a date range rather than a single deadline. Only one of 44C or 44D should be used, not both. Under UCP 600 Article 19, if the latest shipment date falls on a non-banking day, it is not extended to the next banking day for shipment purposes — the goods must be shipped by that date regardless. Exporters should ensure adequate time between the shipment date and the LC expiry to present documents within the 21-day presentation period.

Field 31D specifies the Expiry Date and Place of the LC — the last date by which documents must be presented to the nominated or issuing bank, and the country or bank where presentation must be made. The expiry date is absolute: documents presented after this date will be refused as discrepant under UCP 600 Article 14(c), regardless of the reason for late presentation. The expiry place matters because if expiry is at the issuing bank's counters (in the buyer's country), the exporter must allow additional transit time for documents to reach that bank before expiry. Exporters should always ensure the expiry date allows sufficient time after the latest shipment date to collect, prepare, and present all required documents.

Under UCP 600 Article 30, a tolerance of plus or minus 5% is permitted on the LC amount, quantity of goods, and unit price — unless the LC expressly states that the quantity must not exceed or be less than a specified amount, or the quantity is expressed in a number of packing units or individual items. This means an exporter can invoice for up to 5% more or less than the LC amount without it being a discrepancy, provided the total drawing does not exceed the LC amount. If the LC states 'approximately' before an amount or quantity, a 10% tolerance applies. Exporters should check whether the LC specifies 'exact' amounts, as this overrides the UCP 600 default tolerance and any deviation will be treated as a discrepancy.

Under UCP 600 Article 31, partial shipments are allowed unless the LC expressly prohibits them. If partial shipments are allowed, the exporter can ship the goods in multiple consignments and draw separately under the LC for each shipment, up to the total LC amount. If the LC prohibits partial shipments, all goods must be shipped in a single consignment. Partial drawings under an LC reduce the available balance. Where an LC specifies instalment shipments with defined schedules (e.g. 1,000 units per month for six months), failure to ship any instalment on time means the LC ceases to be available for that and any subsequent instalment, unless the LC explicitly states otherwise under UCP 600 Article 32.

Transhipment means unloading goods from one vessel or conveyance and reloading onto another during transit from the port of loading to the port of discharge. Under UCP 600 Articles 20 and 19, transhipment is allowed unless the LC expressly prohibits it — and even where prohibited, banks will accept a bill of lading showing transhipment will occur if the entire voyage is covered by a single transport document. Exporters shipping through hub ports (such as Singapore, Dubai, or Rotterdam) where cargo routinely tranships should check whether the LC prohibits transhipment and request an amendment if necessary. Prohibiting transhipment in an LC where the shipping route requires it is one of the most common LC drafting errors.

Under UCP 600 Article 20, a bill of lading must show that goods have been shipped on board a named vessel at the port of loading specified in the LC. This is evidenced by an on-board notation on the B/L, which must include the date of loading. If the B/L is pre-printed as 'shipped on board' and is dated, that date is treated as the shipment date. If the B/L shows 'received for shipment' rather than 'shipped on board', a separate on-board notation with a date must be added by the carrier or their agent. Missing or undated on-board notations are one of the most common B/L discrepancies. The date of the on-board notation is critical — it determines whether the latest shipment date and presentation period have been met.

Yes, under UCP 600 Article 10, an LC can be amended at any time before expiry, but only with the agreement of all parties: the issuing bank, the confirming bank if any, and the beneficiary. The applicant (buyer) initiates the amendment request through their bank. Common reasons for amendment include extending the expiry or shipment date, increasing the amount, relaxing document requirements, or correcting errors. The beneficiary can accept or reject an amendment. Partial acceptance is not permitted — the beneficiary must accept or reject the entire amendment. If the beneficiary does not respond, they are deemed to have accepted the amendment only when they present documents that comply with the amended terms. Exporters should never assume an amendment is accepted until they have formally notified the bank.

For agricultural and food product exports, LCs typically require a standard document set plus several additional certificates. Beyond the commercial invoice, bill of lading, and packing list, common requirements include: a Phytosanitary Certificate (for plant products, issued by a government authority confirming the goods are free from pests and disease); a Health Certificate (for animal products, meat, dairy, or seafood, issued by a government veterinary authority); a Certificate of Origin (confirming where the goods were produced, often required in a specific format for preferential tariff treatment); a Fumigation Certificate (confirming goods have been treated against pests); a Quality or Grading Certificate from an approved inspection body; and for Middle Eastern markets, a Halal Certificate issued by an approved halal certification body. Each of these must be obtained, named, and worded in the LC exactly as the importing country's customs authority requires.

These are the three primary methods by which an LC can be honoured, as defined in UCP 600 Article 2. Payment (sight) means the nominated bank pays the beneficiary immediately upon receipt of complying documents. Acceptance means the beneficiary draws a bill of exchange (draft) on the nominated or issuing bank, which the bank accepts — committing to pay on the maturity date. Negotiation means the nominated bank purchases the beneficiary's documents and draft, advancing funds before it has received reimbursement from the issuing bank — the bank takes on the credit risk of the issuing bank in exchange for a discount or fee. The method available under the LC is specified in Field 41D. From the exporter's perspective, sight payment provides the fastest access to funds, while acceptance and deferred payment provide the buyer with a credit period.

A silent confirmation (also called a silent LC confirmation or risk participation) is an arrangement where a bank in the exporter's country agrees to pay the beneficiary if the issuing bank defaults — but without the knowledge or authorisation of the issuing bank. Unlike a formal LC confirmation, which is authorised by the issuing bank and disclosed to all parties, a silent confirmation is a private arrangement between the exporter and their bank. It is not governed by UCP 600 (which only covers authorised confirmations) and is instead a contractual arrangement. Silent confirmations are used where the issuing bank has not authorised or offered confirmation, but the exporter still wants protection against issuing bank default. The cost is typically higher than formal confirmation due to the additional risk the confirming bank takes.

If the issuing bank becomes insolvent after accepting documents but before making payment, the beneficiary becomes an unsecured creditor of that bank — the same position as any other creditor. This is one of the key risks of an unconfirmed LC. To protect against issuing bank insolvency risk, exporters can: request a confirmed LC, where a second bank in the exporter's country adds its own independent payment commitment; obtain silent confirmation from their own bank; or use credit insurance to cover the political and bank risk of the issuing country. For high-value transactions or transactions with banks in less stable economies, the cost of confirmation is almost always justified by the protection it provides.

An assignment of LC proceeds is an arrangement where the beneficiary assigns all or part of the future payment they expect to receive under an LC to a third party — typically a supplier or lender. This is different from a transferable LC: the LC itself is not transferred, only the right to receive the proceeds. The beneficiary remains responsible for presenting compliant documents and satisfying all LC conditions. Assignment of proceeds gives the assignee (the supplier or lender) comfort that payment from the bank will flow to them, but they have no direct claim against the bank — if the beneficiary presents discrepant documents and the bank refuses, the assignee has no recourse against the bank. Assignment of proceeds is useful where the LC cannot be made transferable but the exporter needs to provide their supplier with some payment assurance.