On this page
- What Is a Letter of Credit?
- Who Are the Parties Involved?
- The Letter of Credit Process Step by Step
- Which Documents Are Required Under an LC?
- What Is the Difference Between Sight and Usance Letters of Credit?
- What Are Common LC Discrepancies and How Can You Avoid Them?
- How Can You Pay for Agro Shipments from India by LC?
- Frequently asked questions
The letter of credit process works in five stages: the buyer and seller agree LC terms in the contract, the buyer’s bank issues the LC, the seller’s bank advises it, the seller ships and presents documents, and the bank pays once the documents comply with the LC terms. A letter of credit (LC) replaces the buyer’s promise to pay with a bank’s promise. It is one of the most common ways to pay for a first agri-commodity order from India. This guide explains the parties, each step, the documents and how to avoid the discrepancies that delay payment.
Key takeaways
- An LC is a bank’s written promise to pay the seller when the stated documents are presented and they comply with the credit.
- Banks deal in documents, not goods. Payment depends on correct paperwork, so the LC terms must match the sales contract.
- Under UCP 600, banks have up to five banking days to examine documents, and documents must usually be presented within 21 days of shipment.
- A sight LC pays on compliant presentation. A usance LC pays on a set later date, such as 60 or 90 days after the bill of lading.
What Is a Letter of Credit?
A letter of credit is a written undertaking by a bank to pay the seller a fixed amount, provided the seller presents the documents named in the credit within the agreed time. The buyer’s credit risk is replaced by the bank’s. The seller knows it will be paid if it ships correctly. The buyer knows money is released only against proof of shipment.
Almost all commercial LCs are issued subject to the Uniform Customs and Practice for Documentary Credits, known as UCP 600, published by the International Chamber of Commerce. Under UCP 600 a credit is irrevocable even if it does not say so. It cannot be changed or cancelled without the agreement of the issuing bank, any confirming bank and the seller. Banks deal with documents, not goods, so quality control must be built into the documents. See the HFW client guide to letters of credit for a plain-English summary.
Who Are the Parties Involved?
Every LC has at least four parties. Some credits add a confirming bank or a separate nominated bank.
- Applicant: the buyer or importer who asks its bank to open the LC.
- Issuing bank: the buyer’s bank. It gives the undertaking to pay.
- Beneficiary: the seller or exporter who receives payment.
- Advising bank: a bank in the seller’s country that checks the LC is genuine and passes it to the seller. It does not promise to pay.
- Confirming bank: an optional bank that adds its own promise to pay.
- Nominated or negotiating bank: the bank authorised to examine documents and pay or negotiate. It is often the seller’s own bank.
The Letter of Credit Process Step by Step
The letter of credit process follows the same order for most agri shipments. Steps 2 and 6 need most care.
- Agree the contract. The buyer and seller agree the product, grade, quantity, price, Incoterm, shipment period and payment by LC.
- Share a draft LC. The buyer sends the seller a draft before the bank issues it. The seller checks every clause against the contract and asks for changes now, when they cost nothing.
- Issue the LC. The issuing bank opens the credit, usually by SWIFT message (MT700), and sends it to the advising bank.
- Advise the LC. The advising bank checks the credit is authentic and forwards it to the seller.
- Ship the goods. The seller prepares, tests and loads the cargo within the shipment period. The shipping line issues the bill of lading.
- Present the documents. The seller presents the full document set to the nominated bank before the LC expires and within the presentation period.
- Examine and pay. The banks check the documents. If they comply, the seller is paid at sight or on the agreed future date, and the documents go to the issuing bank.
- Release the documents. The issuing bank debits the buyer, or accepts a usance draft, and hands over the documents. The buyer uses the original bill of lading to collect the cargo.
Two time limits matter most under UCP 600. Each bank has a maximum of five banking days after the day of presentation to decide whether the documents comply. Where a transport document is required, the original must usually be presented no later than 21 calendar days after the shipment date, and never after the LC expiry date. If your LC states a shorter period, that period applies.
Which Documents Are Required Under an LC?
The LC lists every document the seller must present. For agri commodities from India the set is usually the one in the table below.
| Document | Issued by | What the bank checks |
|---|---|---|
| Commercial invoice | Seller | Issued by the beneficiary to the applicant, in the LC currency; goods description matches the LC |
| Packing list | Seller | Quantities, bag count and weights agree with the invoice |
| Bill of lading (full set of originals) | Shipping line or its agent | Shipped on board, correct ports, consignee and notify party, shipment date within the LC period |
| Certificate of origin | Chamber of commerce or authorised agency | Origin India; consistent with the invoice |
| Phytosanitary certificate | Plant Quarantine authority, India | Product and quantity consistent with other documents |
| Certificate of Analysis | Accredited laboratory | Parameters and limits named in the LC |
| Fumigation or inspection certificate | Approved fumigator or surveyor | Only where the LC requires it |
| Insurance certificate (CIF only) | Insurer | At least 110% of the CIF value unless the LC says otherwise; dated no later than shipment |
| Draft (bill of exchange) | Seller | Drawn on the bank named in the LC, for the correct amount and tenor |
For more detail on the key transport document, see our guide to the bill of lading. The documents we supply with each shipment, and the registrations behind them, are listed on our certificates page.
What Is the Difference Between Sight and Usance Letters of Credit?
The difference is when the seller is paid. A sight LC pays as soon as the bank finds the documents compliant. A usance LC, also called a deferred payment or acceptance LC, pays on a fixed later date. This date is often 30, 60, 90 or 180 days after the bill of lading date or after presentation.
A usance LC gives the buyer credit. The buyer can receive and often sell the goods before paying. The seller carries the cost of waiting or of discounting the draft. For this reason, the price under a usance LC is usually higher than under a sight LC. When you compare offers, compare them on the same payment terms. Our article on how an FOB price is built shows where finance costs sit in a quote.
An LC is not the only option. Advance TT, part advance with balance against documents and cash against documents (CAD) are cheaper to run but share risk differently. Our comparison of LC vs CAD vs TT sets out when each one fits.
What Are Common LC Discrepancies and How Can You Avoid Them?
A discrepancy is any difference between the documents and the LC terms, or between the documents themselves. The bank can then refuse to pay until the buyer waives it, which delays payment and adds fees.
- Late shipment or late presentation. Build enough time into the LC. A shipment period that ends before the cargo is ready forces an amendment.
- Expired LC. Set the expiry date at least 21 days after the latest shipment date.
- Goods description mismatch. The invoice must describe the goods as the LC does. Keep the LC description short and put full specifications in the contract.
- Quantity and amount. Use “about” or “approximately” where you need flexibility. Under UCP 600, these words allow a tolerance of 10% more or less.
- Inconsistent data. Names, ports, marks and weights must agree across documents.
- Documents the seller cannot control. Avoid clauses that need a document signed by the buyer.
- Unclear test clauses. If you ask for a Certificate of Analysis, name the parameters and limits. Our lab testing page lists the tests we run for each product.
Related reading: Container Liner Bag: How Dry Bulk Liners Work for Export Cargo.
How Can You Pay for Agro Shipments from India by LC?
The letter of credit process with an Indian exporter is simple if both sides agree the terms before the bank issues the credit. Ask your exporter to review a draft. Use an irrevocable LC at sight for a first order unless you have agreed a usance price.
Elysium Agri Corporation accepts irrevocable letters of credit at sight, as well as advance TT, part advance with balance against documents, and CAD. We invoice in US dollars as standard, and we ship from Mundra, Kandla and Pipavav on FOB, CFR or CIF terms. We review every draft LC before issue and prepare the full document set, including a lot-wise Certificate of Analysis from an NABL-accredited lab. Before you open an LC in our favour, confirm our bank and registration details on our verify Elysium page. You can estimate your total cost with the landed cost calculator.
Tell us the product, grade, quantity, destination port and preferred payment terms, and we will send a quote with a specification sheet within one working day. Request an LC-backed quote →
Frequently asked questions
How does a letter of credit work?
A letter of credit is a bank's promise to pay the seller once the seller presents documents that match the credit terms. The buyer's bank issues it, a bank in the seller's country advises it, and payment follows a compliant presentation. Banks check documents only, not the goods, so the LC terms must match the sales contract exactly.
What are the steps in the letter of credit process?
The main steps are: agree the sales contract, share and approve a draft LC, the issuing bank opens the credit, the advising bank passes it to the seller, the seller ships and presents documents, the banks examine them, payment is made at sight or on a later date, and the buyer receives the documents to collect the cargo.
What documents are needed for a letter of credit?
For agri shipments the usual set is a commercial invoice, packing list, full set of original on-board bills of lading, certificate of origin, phytosanitary certificate and Certificate of Analysis. Some LCs also ask for fumigation or inspection certificates, an insurance certificate under CIF and a draft. Only request documents you really need, because each one can cause a discrepancy.
What is the difference between sight and usance LC?
A sight LC pays the seller as soon as the bank finds the documents compliant. A usance LC pays on a fixed later date, often 30 to 180 days after the bill of lading or presentation. Usance gives the buyer credit, so sellers usually price it higher than a sight LC to cover the cost of waiting or discounting.
Who are the parties in a letter of credit?
The core parties are the applicant (buyer), the issuing bank (buyer's bank), the beneficiary (seller) and the advising bank in the seller's country. A confirming bank may add its own promise to pay, and a nominated or negotiating bank, often the seller's bank, examines the documents and pays or negotiates under the credit.
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