What is a letter of credit (LC)?
An LC is a bank's undertaking to pay against documents, not against delivery. Why that distinction decides most LC disputes.
A letter of credit is an undertaking by the buyer's bank to pay the seller, on presentation of documents that comply exactly with the LC's terms.
The one thing to understand
Banks deal in documents, not goods. The LC is independent of the sales contract. If the documents comply, the bank pays — even if the goods were defective. If the documents do not comply, the bank may refuse — even if the goods arrived perfectly.
Nearly every LC dispute traces back to someone expecting the bank to care about the shipment.
Typical flow
- Buyer and seller agree LC payment, usually off a proforma invoice
- Buyer's bank issues the LC in the seller's favour
- Seller ships and presents documents — invoice, bill of lading, insurance, certificate of origin, inspection certificate
- Banks examine the documents against the LC terms
- If compliant, payment is made; if not, discrepancies are raised
Discrepancies
A large share of first presentations are rejected for discrepancies, most of them clerical: a name spelled differently, a date outside the shipment window, a document missing a signature, a description that does not match the LC wording exactly.
Each discrepancy costs a fee and delays payment, and the buyer may waive it — or use it as leverage.
What people get wrong
Assuming an LC protects against bad goods. It does not. Inspection certificates required as an LC document are the mechanism for that.
Accepting an LC with terms you cannot meet. If the LC requires a document only the buyer can issue, the buyer controls whether you get paid.
Missing the expiry or latest shipment date. Both are hard deadlines.
On Bidancer
Payment instruments are agreed between the two businesses. What the platform contributes is that the counterparty's identity and registration are verified before anyone opens an LC in their favour.