Letter of Credit - Frequently Asked Questions & Answers

LC FAQs, Frequently asked questions and answers about letter of credit to help importers and exporters dealing in international trade.

Here are some of the most commonly asked questions and answers on letters of credit:

1. What is a Letter of Credit?

A letter of credit is a legal written document issued by the importer/buyer’s bank in the favor of the exporter/seller to assure that the seller would be paid on-time by the buyer for their delivered goods & services. In the event of buyer defaults in fulfilling the terms & conditions of the contract or paying a certain amount in an ongoing trade transaction, the issuing bank will make the payment to the exporter. To put it in simple words, it serves as a commitment of guaranteed payment from the buyer to the seller.

2. Types of Letters Of Credit

1. Standby Letter of Credit (SBLC)

2. Credit on Sight LC

3. Time credit LC

4. Revocable and Irrevocable LC

5. Transferable and non-transferable LC

6. Usance Letter of Credit

7. Confirmed and Unconfirmed LC

8. Back to Back LC

9. Red Clause LC

10. Green Clause LC

11. Commercial Letter of Credit

12. Export/Import LC

13. Revolving Bank Credit Letter

14. Traveler's Letter of Credit

15. Time Credit/Acceptance Credit

3. Is the LC and Bank Guarantee the same?

A Letter of credit is a legal guarantee from a bank or financial institution regarding on-time payment to the exporter in the event of the buyer’s failure to perform terms & conditions or pay a certain amount for delivered goods & services.

A bank guarantee is a commercial instrument where the bank only pays the amount if the buyer does not fulfill the contractual obligations mentioned in the contract. To know more check out our detailed blog on "What is the difference between bank guarantee and letter of credit?"