Documentary Letter of Credit FAQ
Documentary Letter of Credit FAQ
You want goods to move and money to land without drama. A Documentary Letter of Credit is the workhorse that makes that happen when open account is too risky. Here is a blunt FAQ that covers how DLCs really work, what banks actually check, and how to avoid costly mistakes.
Quick Fit Check
Frequently Asked Questions
1) What is a Documentary Letter of Credit in plain English
A DLC is a bank’s promise to pay the seller when the seller presents documents that match the LC terms. Banks look at papers, not the goods. If the documents are compliant, payment follows. If the papers are off, banks can refuse and ask for a fix or the buyer’s waiver.
2) Who are the parties
Applicant is the buyer. Issuing bank opens the LC. Beneficiary is the seller. Advising bank notifies the LC to the seller. A nominated bank is the bank authorized to pay, accept, or negotiate. A confirming bank adds its own promise to pay if requested and agreed.
3) Which rules apply UCP 600 or something else
Commercial LCs run under UCP 600. For document checking practices, bankers use ISBP 745 as a guide. If your LC text says it is subject to UCP 600, those rules apply. Know both and you cut down on disputes.
4) LC at sight vs deferred usance what is the difference
Sight means the bank pays on compliant presentation. Deferred or usance means the bank pays on a future maturity date such as 60, 90, or 180 days after shipment or after bill of lading date. Many sellers discount a deferred LC to get cash sooner.
5) Transferable LC vs assignment of proceeds
A transferable LC allows the first beneficiary to transfer the LC to a second beneficiary if the LC states it is transferable. Assignment of proceeds only assigns the right to receive money. It does not let the assignee present documents. If you need suppliers to present documents, you want a transferable LC or a back to back structure, not just an assignment.
6) Back to back LC in one line
You use the incoming LC from the buyer as collateral for a second LC to your supplier. Terms mirror each other with tight wording. Useful for traders who cannot get a large standalone LC line. It is not the same as a transfer.
7) What documents are usually required
Depends on the deal. The common set is: commercial invoice, packing list, transport document, insurance for CIF or CIP, certificate of origin, and inspection if the contract calls for it. Keep the list short and precise. Every extra piece of paper is another chance to get refused.
8) What is confirmation and when do I need it
Confirmation is another bank adding its own promise to pay. You use it when the seller does not trust the issuer or country risk. It costs a fee. It also speeds payout because the confirmer pays the seller and collects from the issuer later. If the beneficiary demands it, budget it from day one.
9) How fast do banks examine documents
Under UCP 600 banks have a set banking day window to examine and decide. In practice, clean sight documents are checked quickly. Complex sets with errors bounce back. If you want money fast, keep wording simple and present a clean set the first time.
10) How long do I have to present documents
Unless the LC says otherwise, presentation must be within 21 days after shipment and before the LC expiry. Many LCs change that. Read your text. Miss the date and you have a fight on your hands.
11) What fees apply and who pays
Typical fees are issuance, advising, amendment, confirmation, negotiation or discounting, reimbursement, and courier or SWIFT. Who pays is set in the LC. If not, expect arguments. Set it in the text to avoid surprises.
12) What is a nominated bank and what is negotiation
The nominated bank is the bank authorized by the LC to pay, accept, or negotiate. Negotiation means the bank purchases drafts or documents under a complying presentation. If you want local funding on presentation, make sure the LC is available with a bank that will negotiate for you.
13) Can I use Incoterms freely in an LC
Yes but use them correctly. CIF and CIP require insurance documents. FOB and FCA do not. If you put CIF in the contract then forget to require insurance in the LC, you have a mismatch. The bank will only ask for what the LC requires. Align contract, Incoterms, and LC text before issuance.
14) Partial shipments and transshipment allowed or not
By default many banks assume they are allowed unless the LC prohibits them. If the buyer needs one lift only, say so. If the route needs a transshipment, do not prohibit it. Keep the text aligned with logistics reality or you will be amending later under pressure.
15) What are the most common discrepancies
- Description mismatch between invoice and LC
- Late shipment or late presentation
- B/L consigned or endorsed incorrectly
- Insurance amount or terms not per LC
- Spelling errors in names and addresses
- Countries, ports, or notify party not matching
- Missing documents the LC actually required
16) What is a red clause or green clause LC
Red clause allows the seller to get an advance before shipment against a simple receipt or warehouse evidence. Green clause ties the advance to warehouse receipts or storage evidence. These are less common but useful where pre-shipment funding is needed and the buyer agrees.
17) Can a DLC be confirmed after issuance
Yes if a confirming bank agrees to add its confirmation to the issued text. This requires a review of the wording and issuer risk. It is usually faster to plan confirmation before issuance so the confirmer shapes the text with you.
18) What is tolerance on quantity and amount
LCs often allow a small tolerance such as plus or minus 10 percent on quantity or amount. If the LC uses the word about or approximately, tolerances may apply by rule. Do not assume. State the allowed variation clearly in the text to avoid hiccups.
19) Can the invoice show a different description than the LC
It must not conflict. A shorter description is fine if it is not inconsistent with the LC. If the LC is overly detailed, either match it word for word or amend the LC to a cleaner description. Pick one path and stick to it.
20) What is latest shipment date and expiry place
Latest shipment date is the last date cargo can be on board or dispatched per the LC. Expiry place is where documents must be presented. If you set expiry in the issuing country but the beneficiary is overseas, build enough time for couriers or use electronic presentation if permitted.
21) What does available by payment, acceptance, or negotiation mean
Payment means pay at sight. Acceptance means accept a draft for payment at maturity. Negotiation means the nominated bank may purchase documents under a complying presentation. The choice affects speed and cost for the seller. Choose based on working capital needs.
22) Can I discount a deferred LC
Yes. Sellers often discount at the nominated or confirming bank. Pricing depends on tenor, issuer quality, and whether the LC is confirmed. If you need cash at shipment, arrange discounting before you load the vessel, not after.
23) What is the practical end to end timeline
24) What is a soft clause and why should I avoid it
Soft clauses are vague conditions like subject to buyer approval that give buyers or banks a veto at payout. Keep the LC documentary and objective. If a condition cannot be proven by a simple document, take it out or you will be negotiating at presentation with money on the line.
25) Can I change the LC after issuance
Yes through an amendment. All parties must agree. Each amendment eats time and fees. Draft it right the first time. If you cannot, batch changes in one amendment rather than drip feeding banks with three or four separate requests.
26) What if documents are discrepant
The bank notifies discrepancies. You can fix and re-present, ask the buyer to waive, or withdraw and ship under a different payment route. Do not ship with a high risk of discrepancies unless you have a pre-agreed waiver plan. That is how margins disappear.
27) Can the LC be payable at a bank in my country
Yes if the LC is available with your local bank by payment, acceptance, or negotiation. This helps speed and communication. If not, you may still present through your bank who will forward documents, but expect more time in transit.
28) Electronic presentation allowed
Only if the LC text permits it or if a bank platform is specified. If the LC requires paper originals, stick to originals. Ask for e-presentation only when both banks are set up for it and your document issuers can deliver in time.
29) How big should the LC be and what about currency
Set the amount to match contract value plus a small buffer for freight or price moves if needed. Use the currency of the contract or the currency you get paid in downstream. If FX risk is real, hedge separately. Do not try to solve FX swings with sloppy LC wording.
30) What is reimbursement and why do I care
Some LCs use a reimbursement bank that pays the nominated bank on the issuer’s instruction. Clean reimbursement instructions reduce delays. If you want fast funds, make sure reimbursement mechanics are clear and realistic for the route you are using.
31) Checklists that stop headaches
32) When does a DLC beat open account with insurance
When the buyer’s credit is thin, when the country is sensitive, when the order is chunky, or when your board wants bank risk not buyer risk. Insurance is great for steady flows and broad portfolios. DLC is great for one-off higher risk deals or when the seller needs bank paper to be comfortable.
33) Can I combine DLC with a standby or guarantee
Yes. Common combos are commercial LC for payment and a standby for advance or performance security. Keep the roles separate. The LC pays for the goods on compliant documents. The standby covers failure to pay or perform outside the shipping documents.
34) What is the smartest way to cut fees without raising risk
- Keep the document list lean and standard
- Use a confirmer only when needed
- Pick a nominated bank that will actually negotiate if you want fast funds
- Reduce amendments by cleaning the draft before issuance
- Set clear fee split in the LC to avoid back charges later
35) How do I explain DLCs to a board that hates details
Say this. We pay a bank to sit between us and the counterparty. We ship against clear documents. If we hit the checklist, the bank pays. Risk shifts from the buyer to a bank we approve. Cost is predictable. Timelines are known. That is why we use it for higher risk or larger orders.
How We Help You Get Paid First Time
Need a Documentary LC that pays without drama
Send your draft LC, contract, shipment plan, and advising bank preference. We will respond with a clean wording pack, bank route, fee elements, and a presentation checklist that gets you paid on first pass.
Start the ProcessThis FAQ is informational. Any LC is subject to bank due diligence, independent credit approval, KYC and AML checks, and executed documentation. Terms, fees, and timelines vary by bank, country, and market conditions.
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