Why a Letter of Credit (L/C) is the Backbone of Safe Export-Import Trade — And how I learned to reject bad letter of credit from a suspecious fraudster.

When you’re in the business of export and import, every deal is a leap of faith. You’re trusting a stranger thousands of miles away to keep their end of the bargain. One late payment or fake document can cause serious losses. That’s why seasoned traders rely on one powerful tool — the Letter of Credit (L/C).

In this blog, I’ll not only explain why the LC Letter of Credit is so critical in global trade, but also share a personal story when I almost fell into a risky deal — and how saying “No” to a poorly written LC saved me from a potential financial mess.

You may also like to read: Irrevocable Letter of Credit (LC): The Safest Payment Method in Export Business

What is a Letter of Credit (L/C)?

A Letter of Credit (L/C), also known as LC Credit or Documentary Credit, is a financial instrument issued by a bank on behalf of the importer (buyer). It guarantees payment to the exporter (seller) — but only if the seller fulfills all the conditions stated in the LC and provides proper documentation.

In other words, the LC Letter acts as a safety net for both parties, especially when they don’t know or fully trust each other.

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My Personal Experience with a Risky LC

A few years ago, I was approached by a new overseas buyer. The deal seemed promising, and the buyer proposed payment via a Letter of Credit from their bank. On the surface, everything looked fine — until I closely reviewed the LC terms.

Here’s what concerned me:

• The conditions were too vague, with phrases like “goods must be satisfactory” instead of clearly defined specs.
• The LC was revocable letter of credit, meaning they could cancel it without my consent.
• There was no mention of bank-to-bank LC confirmation, making it riskier in case of political or banking instability.

As much as I wanted the deal, my instinct said “don’t accept unclear commitments in international trade.” I politely declined and asked for a properly worded, irrevocable letter of credit with specific shipment and payment terms. The buyer never came back — and I’m glad they didn’t.

This experience taught me: Not all LCs are created equal.

You may also like to read:The Difficulties of Cancelling a Letter of Credit in International Trade – A Real-Life Experience

Why a Letter of Credit (L/C) is Crucial in Export-Import Business

Here’s why a well-drafted Letter of Credit (L/C) from a bank is a lifeline for both exporters and importers:

1. Risk Elimination
   Exporters get paid only if they ship goods as agreed. Importers pay only after receiving proper documentation. Win-win.
2. Builds Trust
   With a bank-to-bank LC, both parties work under the supervision of reliable banks — even if they’ve never met.
3. Financing Advantage
   Exporters can use an irrevocable LC to get pre-shipment finance or discount their receivables.
4. Legal Safety
   Governed by international rules like UCP 600, an irrevocable documentary credit offers legal protection if things go south.
5. Smooth Customs Clearance
   Documented proof in a documentary credit streamlines regulatory compliance and cargo clearance.

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Types of Letter of Credit (With Real-World Uses)

Understanding the types of LC is key to choosing the one that fits your trade:

1. Irrevocable Letter of Credit

• Cannot be changed or cancelled without the consent of all parties.
• LC Irrevocable is the most secure form.
• Tip: Always insist on this.

2. Revocable LC

• Can be changed without notice. Avoid this unless dealing with a trusted partner.

3. Confirmed LC

• A second bank (usually in the exporter’s country) confirms the LC, guaranteeing payment even if the foreign buyer’s bank defaults.

4. Sight LC vs. Usance LC

• Sight LC: Immediate payment upon document verification.
• Usance LC: Payment after a credit period (30, 60, 90 days).

5. Transferable LC

• The original beneficiary can transfer part of the credit to another supplier — useful in intermediary trades.

6. Back-to-Back LC

• Ideal for middlemen who need to place a second order based on the original LC.

7. Revolving LC

• Renewing LC used for ongoing shipments over time.

8. Standby Letter of Credit (SBLC)

• Works more like a financial guarantee — payment happens only if something goes wrong.

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Letter of Credit Example (Simple Flow)

1. Buyer and seller agree on terms.
2. Buyer requests Letter of Credit from bank.
3. Issuing bank sends LC to exporter’s bank.
4. Exporter ships goods and submits documents.
5. Bank checks documents and releases payment.

This bank-to-bank LC process adds professionalism, accountability, and security to the transaction.

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What You Should Remember while receiving a l/c

• Always read every LC carefully. Don’t assume just because it’s from a bank that it’s safe.
• Insist on irrevocable, clearly defined terms, and documentary credit conditions.
• If unsure, consult an expert or your bank before accepting an LC.

Had I not followed my gut that day, I could have lost goods worth lakhs. A Letter of Credit is your shield — but only if you know how to use it.