Letter of Credit Types and Best Practices

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).

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