Letter of Credit Types and Best Practices

19 April 2025·Updated Jan 2026·6 min read·GuideIntermediate

In this article

Letter of Credit Types and Best Practices
Documentary Requirements That Avoid Discrepancies
Negotiating LC Terms with Your Bank
How an LC Transaction Actually Flows from Order to Payment
Worked Example: A Discrepancy That Delayed Payment by Three Weeks
Common Mistakes Exporters Make with Letters of Credit
Standby LCs and Revolving LCs: When to Use the Less Common Types

Key Takeaways

Letters of credit guarantee payment in international trade — choose the right type for your transaction risk level

Letter of Credit Types and Best Practices
Documentary Requirements That Avoid Discrepancies
Negotiating LC Terms with Your Bank
How an LC Transaction Actually Flows from Order to Payment
Worked Example: A Discrepancy That Delayed Payment by Three Weeks

Letter of Credit Types and Best Practices#

LCs provide payment security: the bank pays the seller when document requirements are met, regardless of buyer's financial condition. Types: irrevocable (can't be canceled — standard), confirmed (second bank adds guarantee — use for risky countries), standby (backup payment guarantee — like insurance), and revolving (auto-renews for repeat shipments — efficient for regular suppliers).

Documentary Requirements That Avoid Discrepancies#

75% of first-presentation LC documents are rejected for discrepancies. Common errors: misspelled beneficiary name, incorrect description of goods, late shipment date, missing documents, and port name differences. Prevention: create a document checklist from LC terms, verify every field matches exactly, and use a pre-shipment document review. One wrong letter in a company name can cause rejection.

Negotiating LC Terms with Your Bank#

LC costs: opening fee (0.1-0.5% of value), confirmation fee (0.2-1.5%), amendment fee ($50-100 each), discrepancy fee ($50-75 each). Negotiate: lower opening fees for high-volume relationships (>20 LCs/year), blanket confirmation lines vs per-LC confirmation, and extended document presentation periods (21 days vs standard 5 business days).

How an LC Transaction Actually Flows from Order to Payment#

Understanding the mechanics end to end helps explain why documentary precision matters so much. First, buyer and seller agree on LC payment terms in the sales contract. Second, the buyer applies to its bank (the issuing bank) to open the LC, specifying exact terms: goods description, shipment deadline, required documents, and presentation period. Third, the issuing bank sends the LC to the seller's bank (the advising bank, sometimes also the confirming bank), which notifies the seller the LC has been opened. Fourth, the seller reviews the LC terms against the underlying sales contract — this is the critical checkpoint most sellers rush through — and requests amendments if anything doesn't match what was agreed. Fifth, the seller manufactures and ships the goods, then assembles the required documents: commercial invoice, packing list, bill of lading, certificate of origin, inspection certificate, insurance certificate, whatever the LC specifies. Sixth, the seller presents these documents to its bank within the presentation period (commonly 21 days after shipment, but LC-specific). Seventh, the bank examines documents against the LC terms under UCP 600 rules — this is a strict, literal comparison, not a judgment call about whether the shipment was fine in substance. Eighth, if documents comply exactly, payment is made or a deferred payment undertaking is issued; if discrepancies exist, the bank can refuse payment until they're resolved, which can mean the buyer has to waive the discrepancy or the documents get amended and re-presented, both of which cost time and sometimes fees.

Worked Example: A Discrepancy That Delayed Payment by Three Weeks#

Consider a machine parts exporter shipping a $340,000 order to a buyer in Nigeria under an irrevocable, confirmed LC. The LC specified the goods description as "CNC precision machined steel components, per PO #4471" and required shipment no later than a fixed date, with documents presented within 21 days of the bill of lading date. The exporter shipped on time, but the commercial invoice described the goods as "machined steel parts" — close in meaning but not an exact match to the LC's specified wording — and the packing list showed a total weight that differed by 40kg from the bill of lading due to a rounding difference between two departments preparing the documents separately. Both are minor, immaterial differences in the real world, but under UCP 600's strict compliance standard, the confirming bank flagged both as discrepancies and refused payment pending resolution. Resolving it required the exporter's bank to contact the buyer for a discrepancy waiver, which the buyer granted, but the back-and-forth took three weeks — during which the exporter's $340,000 was tied up, its working capital plan for the next production run was disrupted, and it paid a $65 discrepancy fee on top of the delay. The fix going forward: the exporter now runs every export document through a single reviewer who checks it word-for-word against the LC's exact language before presentation, rather than having invoice and packing list prepared independently by different departments.

Common Mistakes Exporters Make with Letters of Credit#

The most common and costly mistake is not reviewing the LC terms against the sales contract the moment the LC arrives — sellers who wait until shipment is imminent to check the LC often discover a mismatch (wrong shipment deadline, wrong port, missing document requirement) too late to request an amendment before the deadline, forcing a rushed and expensive amendment process or a scramble to comply with terms that don't match reality. A second mistake is treating document preparation as a clerical afterthought rather than a discipline — as the machine parts example shows, even immaterial wording or rounding differences trigger discrepancies under UCP 600's strict compliance rule, because banks examine documents on their face, not the underlying commercial reality. Third, many exporters choose an unconfirmed LC to save the confirmation fee when shipping to a buyer in a country with elevated banking or political risk, not realizing that an unconfirmed LC still depends entirely on the issuing bank's ability and willingness to pay — if that bank fails or the country imposes currency controls, the exporter has no recourse from a second bank's guarantee. Fourth, businesses frequently let LC costs erode margin unnoticed by treating opening fees, confirmation fees, and discrepancy fees as unavoidable overhead rather than negotiable line items tied to relationship volume. Tracking LC terms, document deadlines, and discrepancy patterns across a company's export shipments — the kind of operational visibility AskBiz's trade intelligence tools support — helps exporters catch a mismatched LC term before shipment rather than after documents are rejected.

Standby LCs and Revolving LCs: When to Use the Less Common Types#

Standby letters of credit function differently from commercial LCs — rather than being the primary payment mechanism, a standby LC sits in the background as a guarantee that only gets drawn if the applicant fails to perform under the underlying contract, similar in function to a bank guarantee. A common use case: a buyer pays an exporter by wire transfer on open account terms (cheaper and faster than a commercial LC), but the exporter requires the buyer to post a standby LC as security in case the wire payment doesn't arrive on schedule — the standby is never expected to be drawn, but its existence gives the exporter recourse if the buyer defaults. This combination lets trading partners with an established relationship move away from the cost and friction of commercial LCs on every shipment while retaining a safety net. Revolving LCs solve a different problem: for an importer receiving regular shipments from the same supplier — say, monthly container loads under a long-term supply agreement — opening and closing a new commercial LC for every shipment is administratively wasteful and expensive in cumulative opening fees. A revolving LC is opened once for a defined value or shipment schedule and automatically renews (revolves) after each drawdown, either on a time basis (a fixed amount available each month) or a value basis (the full amount becomes available again once the prior drawdown is settled). The tradeoff is that a revolving LC ties up more of the buyer's credit facility for longer, since the bank is effectively committing to the full annual exposure rather than one shipment's worth at a time, so buyers should weigh the administrative savings against the credit line impact before requesting one.

📊 By The Numbers

75%0.5%1.5%$50$340,000

Letter of Credit Types and Best Practices

Letter of Credit Types and Best Practices#

Documentary Requirements That Avoid Discrepancies#

Negotiating LC Terms with Your Bank#

How an LC Transaction Actually Flows from Order to Payment#

Worked Example: A Discrepancy That Delayed Payment by Three Weeks#

Common Mistakes Exporters Make with Letters of Credit#

Standby LCs and Revolving LCs: When to Use the Less Common Types#

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