Documentary Letter of Credit Process, Step by Step
The documentary letter of credit process runs from the sales contract to final payment, and the importer drives most of it. A documentary letter of credit (LC) is the buyer's bank promising to pay the seller once the seller presents documents that match the credit. For an.
The documentary letter of credit process runs from the sales contract to final payment, and the importer drives most of it. A documentary letter of credit (LC) is the buyer's bank promising to pay the seller once the seller presents documents that match the credit. For an importer, opening one is part credit approval and part drafting exercise. Delays usually come from the credit side, not the paperwork. This guide walks through each stage in the order a bank actually runs it, and shows where files usually stall.
Short answer: agree LC terms in the contract, make sure your bank has approved a credit line or will take cash margin, submit the application with the supplier and shipment details, agree the draft wording with the supplier, and let the bank issue by SWIFT. After that you manage amendments, documents and payment.
Before you start: who does what
The importer is the applicant. The supplier is the beneficiary. Your bank is the issuing bank. The supplier's bank usually acts as advising bank and checks that the credit looks authentic before passing it on. If the supplier wants extra protection against your bank or your country, a confirming bank adds its own undertaking. Our guide to confirmed and unconfirmed letters of credit covers when that matters.
The documentary letter of credit process: how to open an LC, step by step
Agree the LC terms in the sales contract
Write the payment clause before you approach the bank: LC type (sight or usance), amount and tolerance, latest shipment date, expiry, Incoterms rule, port of loading and discharge, partial shipments and the documents required. If the contract is vague, the LC wording becomes a negotiation later. See how Incoterms and LC wording need to line up.
Confirm your bank has an LC line for you
An LC is a credit exposure for the bank. It will issue against an approved trade line or against cash margin. If you have no line, this is the longest step. Ask early what limit, security and margin the bank expects. If a first application has already been turned down, read what to do when a bank declines a first LC application.
Gather the documents the bank will ask for
Expect company KYC, ownership details, recent financial statements, bank statements, the contract or pro forma invoice, supplier identity and bank details, and evidence of how the goods will be resold. Our LC application checklist for buyers lists the usual items.
Complete the LC application
The application form, often filed through online banking, sets out every field that will appear in the credit. Fill it from the contract, not from memory. Keep the document list short and specific: each extra document is another chance for a discrepancy that delays payment to the supplier.
Review the draft wording with the supplier
Send the draft to the supplier before issuance. Ask them to confirm they can produce every document, in the stated form, within the presentation period. Fixing a clause now is a quick edit. Fixing it after issuance means an amendment that the beneficiary must accept.
Bank issues the LC by SWIFT MT700
Once approved, the issuing bank sends the credit to the advising bank, normally as an MT700 message. The MT700 field guide explains each field. The supplier now has a bank undertaking and can start production or book shipment.
Track amendments, shipment and presentation
If dates or quantities change, request an amendment before the supplier ships, not after. Our note on when to amend a letter of credit before shipment covers the timing. After shipment the supplier presents documents and the banks examine them against the credit.
Pay or accept at maturity and close the LC
For a sight LC the bank pays when documents comply. For a usance LC it accepts and pays at maturity, and you reimburse the bank under your facility. If documents are discrepant, the bank will ask whether you waive the discrepancies. Decide quickly, because the goods may already be at port.
What decides how long it takes
The question "how long does it take to open a letter of credit" has no single answer, because the drafting is rarely the slow part. The table shows where time goes.
| Stage | What drives the time | How to shorten it |
|---|---|---|
| Credit line approval | Whether the bank already knows you, your financials and the size of the request | Start the line before the first order; present clean financials and a clear repayment source |
| KYC and compliance | Ownership complexity, countries involved, goods description and sanctions screening | Prepare a complete KYC pack and a plain description of the trade flow |
| Application and wording | Unclear contract terms, long document lists, supplier objections | Agree terms in the contract and share the draft with the supplier first |
| Issuance and advising | Bank processing queues and the advising bank's authentication | Give the correct advising bank SWIFT code and beneficiary details |
| Amendments | Changes to dates, quantity or documents after issuance | Build realistic shipment and expiry dates into the first draft |
Common mistakes that delay issuance
- Applying for an LC before the bank has approved any trade limit.
- Copying a supplier's template that asks for documents nobody can produce.
- Shipment and expiry dates that leave no time for presentation.
- Goods descriptions in the LC that differ from the commercial invoice.
- Expecting the bank to fund the purchase without margin, security or a resale plan.
What it costs
Banks charge issuance, amendment, advising and, where used, confirmation fees, and pricing depends on your credit and the country risk. We do not quote bank pricing here because it varies by bank and file. Our overview of documentary LC fees for importers and exporters explains each charge.
Where an advisor helps
Where a bank line is missing or too small, an arranger can prepare the credit file, structure the LC so the supplier will accept it, and approach banks or financiers that fit the trade. Financely works as an advisor and arranger on that process. It does not issue the LC itself, and approval stays with the bank.
Frequently Asked Questions
Who opens a letter of credit, the buyer or the seller?
The buyer, called the applicant, asks its bank to issue the letter of credit in favor of the seller, called the beneficiary. The seller can request it, but only the buyer can apply. The seller's bank usually acts as advising bank, and a confirming bank can add its own undertaking if the seller wants extra protection.
How long does it take to open a letter of credit?
If the buyer already has an approved LC line and the wording is agreed, issuance can be quick. If the bank must first approve a new credit line, credit review usually takes much longer than drafting. The biggest delays come from missing KYC documents and wording disputes with the supplier.
Can I open a letter of credit without a credit line?
Banks issue letters of credit against a credit limit or against cash margin. Without an approved line, the bank will usually ask for full or partial cash cover, or decline. Building a credit file before the first order is the practical fix.
What documents do I need to apply for a letter of credit?
Typically company KYC, ownership details, recent financial statements, bank statements, the sales contract or pro forma invoice, supplier identity and bank details, shipping terms and the list of documents the supplier must present. Each bank sets its own checklist, so ask for it early and fill in the application from the contract, not from memory.
Which rules govern a documentary letter of credit?
Most commercial letters of credit state that they are subject to UCP 600, the ICC rules for documentary credits. Under UCP 600 a credit is irrevocable, and banks deal with documents, not goods. That is why the goods description and document list in the credit need to match the contract and commercial invoice.
Need a letter of credit opened for a live purchase?
See how Financely structures this on Letter of Credit Services, Types, Costs and Process, or send the file for review.
Financely is an advisor and arranger. It does not lend, issue letters of credit or take title to goods, and no financing outcome is promised. Any facility depends on the credit approval of the bank or financier. This guide is general information, not legal, tax or regulatory advice.
Sources and references (checked 14 November 2026)