{"id":3045,"date":"2026-09-16T10:00:06","date_gmt":"2026-09-16T08:00:06","guid":{"rendered":"https:\/\/mwtsourcing.com\/?p=3045"},"modified":"2026-10-06T05:02:07","modified_gmt":"2026-10-06T03:02:07","slug":"letter-of-credit-payment","status":"publish","type":"post","link":"https:\/\/mwtsourcing.com\/en\/letter-of-credit-payment\/","title":{"rendered":"Letter of credit payment : complete guide"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">In 2023, the <\/span><b>International Chamber of Commerce<\/b><span style=\"font-weight: 400;\"> estimated that letters of credit supported over $2.8 trillion in global trade transactions. For any business importing goods, particularly from manufacturing hubs like China, understanding <\/span><b>letter of credit payment<\/b><span style=\"font-weight: 400;\"> mechanics is not optional, it&#8217;s a competitive advantage.<\/span><\/p>\n<h2><b>What is a letter of credit and how does it work ?<\/b><\/h2>\n<p><img decoding=\"async\" width=\"1200\" height=\"799\" class=\"aligncenter size-large wp-image-3038\" src=\"https:\/\/mwtsourcing.com\/wp-content\/uploads\/2026\/10\/Letter-of-Credit-on-Office-Desk-1200x799.png\" alt=\"Letter of Credit on Office Desk\" srcset=\"https:\/\/mwtsourcing.com\/wp-content\/uploads\/2026\/10\/Letter-of-Credit-on-Office-Desk-1200x799.png 1200w, https:\/\/mwtsourcing.com\/wp-content\/uploads\/2026\/10\/Letter-of-Credit-on-Office-Desk.png 1537w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<blockquote><p><span style=\"font-weight: 400;\">A <\/span><b>letter of credit<\/b><span style=\"font-weight: 400;\"> (LC) is a financial instrument issued by a buyer&#8217;s bank, guaranteeing that a seller will receive payment once they fulfill specific documentary conditions. It acts as a contractual bridge between two parties who may not fully trust each other, which is exactly the situation when <a href=\"https:\/\/mwtsourcing.com\/en\/our-solutions\/procurement\/\">sourcing internationally<\/a>.<\/span><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">The bank substitutes its own creditworthiness for that of the buyer, which fundamentally changes the risk equation for the exporter.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Four main actors are involved in every <\/span><b>LC payment process<\/b><span style=\"font-weight: 400;\"> :<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The applicant<\/b><span style=\"font-weight: 400;\"> : the buyer who requests the LC from their bank<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The issuing bank<\/b><span style=\"font-weight: 400;\"> : the buyer&#8217;s bank that creates and guarantees the LC<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The beneficiary<\/b><span style=\"font-weight: 400;\"> : the seller who receives the payment guarantee<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><b>The advising\/confirming bank<\/b><span style=\"font-weight: 400;\"> : a bank in the seller&#8217;s country that verifies and sometimes confirms the LC<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">The mechanism only triggers payment when the seller presents a <\/span><b>compliant set of documents<\/b><span style=\"font-weight: 400;\">, typically a commercial invoice, bill of lading, packing list, and certificate of origin.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Any discrepancy, even a minor spelling error, can block the payment. This is why meticulous document preparation matters so much when managing <a href=\"https:\/\/mwtsourcing.com\/en\/our-solutions\/logistics-management\/\">cross-border supply chains<\/a>.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">When you&#8217;re coordinating shipments from Chinese factories, having <\/span><i><span style=\"font-weight: 400;\">full visibility over documentation deadlines<\/span><\/i><span style=\"font-weight: 400;\"> is critical. A dedicated supply chain dashboard helps track each document&#8217;s status before the LC expiry date, preventing costly discrepancies that delay funds.<\/span><\/p>\n<h2><b>The main types of letter of credit payment<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">Not all LCs are identical. The type chosen directly affects <\/span><b>risk distribution between buyer and seller<\/b><span style=\"font-weight: 400;\">, as well as the cost and complexity of the transaction. Choosing the wrong variant for your trade context can expose you to unnecessary financial risk.<\/span><\/p>\n<table>\n<tbody>\n<tr>\n<td><b>Type of LC<\/b><\/td>\n<td><b>Key feature<\/b><\/td>\n<td><b>Best for<\/b><\/td>\n<\/tr>\n<tr>\n<td><b>Revocable LC<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Can be modified without the beneficiary&#8217;s consent<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Rarely used today; high risk for seller<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Irrevocable LC<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Cannot be changed without all parties&#8217; agreement<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Standard for most international trade<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Confirmed LC<\/b><\/td>\n<td><span style=\"font-weight: 400;\">A second bank adds its guarantee to the LC<\/span><\/td>\n<td><span style=\"font-weight: 400;\">High-risk countries or unknown issuing banks<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Standby LC<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Used as a backup payment mechanism<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Long-term supplier relationships<\/span><\/td>\n<\/tr>\n<tr>\n<td><b>Transferable LC<\/b><\/td>\n<td><span style=\"font-weight: 400;\">Beneficiary can transfer rights to a third party<\/span><\/td>\n<td><span style=\"font-weight: 400;\">Intermediaries and trading companies<\/span><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<blockquote><p><span style=\"font-weight: 400;\">The <\/span><i><span style=\"font-weight: 400;\">irrevocable confirmed letter of credit<\/span><\/i><span style=\"font-weight: 400;\"> is by far the most secure option for sellers. When sourcing from <a href=\"https:\/\/mwtsourcing.com\/en\/our-resources\/sourcing-china\/\">suppliers in China<\/a>, a confirmed LC adds a local bank&#8217;s guarantee on top of the Chinese importer&#8217;s bank, which significantly reduces exposure to country risk or currency restrictions.<\/span><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">For buyers, this extra security comes at an additional banking cost, typically 0.5% to 1.5% of the transaction value.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Standby LCs deserve special attention. Unlike a traditional LC activated by document presentation, a standby LC only comes into play if the buyer <\/span><i><span style=\"font-weight: 400;\">fails<\/span><\/i><span style=\"font-weight: 400;\"> to pay.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It functions more like a guarantee than a payment method, making it <\/span>ideal for established <a href=\"https:\/\/mwtsourcing.com\/en\/what-are-the-key-steps-of-the-procurement-process\/\">supplier relationships<\/a><span style=\"font-weight: 400;\"> where trust has been built over several sourcing cycles.<\/span><\/p>\n<h2><b>Step-by-step walkthrough of the LC payment process<\/b><\/h2>\n<p><img decoding=\"async\" width=\"1200\" height=\"800\" class=\"aligncenter size-large wp-image-3048\" src=\"https:\/\/mwtsourcing.com\/wp-content\/uploads\/2026\/10\/A-person-calculating-payment-1200x800.jpg\" alt=\"A person calculating payment\" srcset=\"https:\/\/mwtsourcing.com\/wp-content\/uploads\/2026\/10\/A-person-calculating-payment-1200x800.jpg 1200w, https:\/\/mwtsourcing.com\/wp-content\/uploads\/2026\/10\/A-person-calculating-payment.jpg 1280w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/p>\n<blockquote><p><span style=\"font-weight: 400;\">The <\/span><b>LC payment workflow<\/b><span style=\"font-weight: 400;\"> follows a structured sequence. Each step must be executed correctly to avoid delays or discrepancies that hold up funds, sometimes for weeks.<\/span><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">First, buyer and seller agree on LC terms within the sales contract, specifying <\/span><i><span style=\"font-weight: 400;\">the currency, expiry date, port of shipment, and required documents<\/span><\/i><span style=\"font-weight: 400;\">. The buyer then applies to their bank, submitting the sales contract and any required collateral. The issuing bank reviews the application and, if approved, transmits the LC to the advising bank in the seller&#8217;s country.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Once the seller receives and verifies the LC, they prepare the shipment and gather all required documents. This stage is where <\/span><a href=\"https:\/\/mwtsourcing.com\/en\/our-solutions\/logistics-management\/\">supply chain coordination<\/a> becomes decisive<span style=\"font-weight: 400;\">. A single mismatch between the LC terms and the documents, the wrong Incoterm on the invoice, an incorrect port name on the bill of lading, creates a discrepancy that the bank will reject.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">After the seller presents the compliant documents to their bank, the document verification process typically takes 5 banking days under <\/span><i><span style=\"font-weight: 400;\">UCP 600 rules<\/span><\/i><span style=\"font-weight: 400;\">, the ICC&#8217;s Uniform Customs and Practice for Documentary Credits, in force since 2007. Once verified, the issuing bank releases payment to the seller&#8217;s bank, which credits the beneficiary&#8217;s account.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Managing this process manually across multiple suppliers is genuinely complex. A structured tracking system, the kind that maps each document against LC requirements in real time, dramatically reduces discrepancy rates.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For buyers handling several concurrent orders from Asian suppliers, <\/span><b>centralizing LC document tracking<\/b><span style=\"font-weight: 400;\"> within a single operational dashboard is the difference between smooth settlements and expensive renegotiations.<\/span><\/p>\n<h2><b>Practical tips to reduce LC payment risks and costs<\/b><\/h2>\n<p><span style=\"font-weight: 400;\">One recurring mistake is treating the LC as purely a banking formality. It&#8217;s actually a <\/span><b>precision instrument that demands commercial and logistical alignment<\/b><span style=\"font-weight: 400;\">. Request a draft LC from your bank before issuance, and share it with your supplier for review. Catching a discrepancy in the draft costs nothing; catching it after shipment can cost you the entire transaction value.<\/span><\/p>\n<blockquote><p><span style=\"font-weight: 400;\">Negotiate <\/span><b>reasonable presentation periods<\/b><span style=\"font-weight: 400;\">. UCP 600 sets a default of 21 days after the shipment date to present documents, but complex logistics from Chinese ports sometimes push document availability beyond this window. Explicitly extending this period in the LC terms prevents last-minute scrambles.<\/span><\/p><\/blockquote>\n<p><span style=\"font-weight: 400;\">Finally, keep your <\/span><i><span style=\"font-weight: 400;\">banking relationships and LC structures<\/span><\/i><span style=\"font-weight: 400;\"> under active review. As your sourcing volume grows, you may qualify for reduced LC fees or pre-approved LC lines that accelerate issuance. Visibility over your payment performance data, including discrepancy rates per supplier, gives you real leverage to renegotiate both supplier contracts and banking conditions.<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"In 2023, the International Chamber of Commerce estimated that letters of credit supported over $2.8 trillion in [&hellip;]","protected":false},"author":3,"featured_media":3046,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[11],"tags":[],"class_list":["post-3045","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-blog-en"],"acf":[],"_links":{"self":[{"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/posts\/3045","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/users\/3"}],"replies":[{"embeddable":true,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/comments?post=3045"}],"version-history":[{"count":1,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/posts\/3045\/revisions"}],"predecessor-version":[{"id":3050,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/posts\/3045\/revisions\/3050"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/media\/3046"}],"wp:attachment":[{"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/media?parent=3045"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/categories?post=3045"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mwtsourcing.com\/en\/wp-json\/wp\/v2\/tags?post=3045"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}