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Glossary · Trade terms
What is L/C (Letter of credit)?
A bank's written promise to pay the seller once it presents documents that comply exactly with the credit's terms, such as the bill of lading and invoice.
With a documentary letter of credit, the buyer's bank undertakes to pay the seller when the seller presents the documents listed in the credit, for example the commercial invoice, packing list, bill of lading and an inspection certificate. Most L/Cs are issued under the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600).
Banks check documents, not goods. An L/C protects against a supplier that never ships, but it says nothing about quality unless the credit requires an independent inspection certificate. Small discrepancies in the documents can delay payment for both sides.
L/Cs carry bank fees and paperwork, so many Chinese suppliers prefer T/T for smaller orders. They are more common on large orders and new trading relationships.
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