Documentary Trade

Letter of Credit in Trade Finance: How the Process Works

A letter of credit is one of the core payment mechanisms in cross-border trade because it creates a bank undertaking that is separate from the underlying sales contract. The exporter ships and presents the required documents; the bank examines those documents against the credit terms; payment follows when the presentation complies.

The commercial value comes from structure, not from the acronym. Financely’s LC issuance support process focuses on issuer fit, documentary conditions and closing mechanics.

From Contract to Issuance

The buyer and seller first agree payment by LC in the sales contract. The applicant then requests issuance from its bank or an arranged issuing institution. The LC should reflect the contract on amount, currency, shipment dates, partial shipment, transshipment, Incoterms, document requirements and payment tenor.

IssueApplicant instructs the issuing bank.PresentBeneficiary presents compliant documents.HonorBank pays, accepts or undertakes deferred payment.

Shipment and Document Presentation

After shipment, the beneficiary presents the required documents through the nominated or advising bank. Common documents include a commercial invoice, transport document, packing list, certificate of origin, inspection certificate and insurance document. The exact set should match the actual trade rather than a generic template.

Sight, Deferred Payment and Discounting

A sight LC is payable upon compliant presentation and examination. A deferred-payment LC pays at a future maturity. Where acceptable to a financier, the beneficiary may obtain early cash by discounting the bank obligation through letter of credit discounting.

Avoid discrepancy by design

Many LC problems begin before issuance. Draft the credit around documents the exporter can actually produce and deadlines the logistics chain can actually meet.

Frequently Asked Questions

Who is the applicant in an LC?

Usually the buyer or importer requesting the bank to issue the credit.

Who is the beneficiary?

Usually the seller or exporter entitled to present documents and receive payment under the LC.

Can Financely review a draft LC?

Yes. LC advisory can cover wording, documentary conditions, bank presentation and execution planning.

Discuss a Financing Mandate With Financely

For companies with a defined trade, project or business financing requirement, Financely can review the transaction, structure the lender case and run targeted institutional outreach under a paid engagement.

Start Your EngagementFinancely provides paid advisory and transaction execution support. Financely is not a direct lender and does not guarantee lender interest, pricing, approval or closing. Third-party financial institutions make independent KYC, compliance and credit decisions.