Letters of Credit and Trade Finance

Export Letter of Credit: How Exporters Get Paid

What an export letter of credit is

The same letter of credit is called an import LC by the buyer and an export LC by the seller. For the exporter, it is an undertaking by the issuing bank to pay a stated amount if the exporter presents complying documents within the validity period.

Key points for exporters:

• The undertaking is from the issuing bank, not the buyer.
• The bank pays on documents, not on the condition of the goods.
• The LC is independent of the sales contract. If the LC terms differ from the contract, the LC terms apply to payment.
• Most LCs are issued subject to the ICC's Uniform Customs and Practice, UCP 600.

Importers can read the mirror guide, letters of credit for importers. For a general overview, see documentary letter of credit.

How an export LC works from advice to payment

1. Contract. Exporter and buyer agree that payment will be by LC, and ideally agree the main LC terms in the contract.
2. Issuance. The buyer's bank issues the LC, usually via SWIFT MT700, to a bank in the exporter's country.
3. Advice. The advising bank checks that the LC is authentic and passes it to the exporter. It does not promise to pay unless it also confirms.
4. Review. The exporter reads every term and asks for amendments before shipping if anything cannot be met.
5. Shipment. The exporter ships within the latest shipment date.
6. Presentation. The exporter presents documents to the nominated bank within the presentation period and before expiry.
7. Examination. Banks check the documents against the LC.
8. Payment. If documents comply, the bank pays at sight or accepts to pay later.

Delays most often happen at steps 4 and 7. See our related guide on letter of credit discounting explained.

Sight vs usance on export LCs

A sight LC pays when compliant documents are presented and checked. This gives the exporter cash fastest. See sight letter of credit.

A usance LC, also called deferred payment or acceptance, pays at a later date, such as a number of days after the bill of lading date. The buyer gets time to sell the goods; the exporter waits. See the usance letter of credit guide.

Exporters often accept usance terms to win business, then discount the accepted payment to get cash early.

Confirmation and discounting options

Confirmation. If the issuing bank or its country is a concern, the exporter can ask a bank it trusts to confirm the LC. The confirming bank then also promises to pay. This removes issuing bank and country risk. Confirmation costs a fee, which depends on the bank and country risk. See confirmed letter of credit and letter of credit fees explained.

Silent confirmation. Where the LC does not invite confirmation, some banks offer cover under a separate agreement with the exporter.

Discounting. Under a usance LC, once the bank has accepted or incurred a deferred payment undertaking, the exporter can sell that claim at a discount for immediate cash.

Pre-shipment finance. Some lenders advance funds to produce or buy the goods against a confirmed export LC. This often makes the deal self-liquidating.

Transfer. Intermediaries can ask for a transferable LC to pass rights to their supplier. See transferable letter of credit.

Common document and discrepancy issues

Banks reject presentations for small differences. Common problems:

• Late shipment or late presentation.
• An expired LC.
• Description of goods on the invoice not matching the LC.
• Inconsistent data between documents, such as weights or marks.
• Bills of lading that are not clean, not on board or wrongly consigned.
• Missing signatures, certificates or copies.
• Insurance documents with the wrong amount, risks or date.
• Terms the exporter cannot control, such as documents to be signed by the buyer.

To reduce the risk:

• Review the LC immediately on receipt and request amendments early.
• Use a checklist for each document.
• Build realistic time into shipment and presentation dates.
• Refuse terms that put payment in the buyer's hands.

If documents are discrepant, the bank may seek the buyer's waiver, but payment protection is weaker.

How Financely helps exporters arrange workable LCs

Financely is a fee-based arranger and advisor, not a bank or lender. We do not issue, confirm or discount LCs ourselves. We help exporters:

• Draft LC terms to propose to the buyer before issuance.
• Review received LCs for unworkable conditions.
• Identify banks that may confirm or discount, and prepare the request.
• Structure pre-shipment funding against export LCs.

Fees pay for that work, not for an outcome, and each bank makes its own decision. See trade finance advisory and trade finance.

Frequently asked questions

What is an export letter of credit?

It is a letter of credit issued by the buyer's bank in favour of the exporter, promising payment against compliant documents.

Is an export LC different from an import LC?

It is the same instrument. The name depends on whose side you are on.

Should an exporter always ask for confirmation?

Not always. Confirmation is useful when issuing bank or country risk is a concern. It adds cost.

Can I get cash before the LC pays?

Yes. Pre-shipment finance or discounting of an accepted usance LC can release cash early, subject to a bank's approval.