In international trade, a Letter of Credit (L/C) is one of the safest and most widely used payment methods, especially when the buyer and seller do not yet have an established transaction history.

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

A Letter of Credit (L/C) is a conditional payment commitment issued by a bank at the request of the buyer (importer), guaranteeing payment to the seller (exporter) once the seller presents documents that comply with the terms and conditions specified in the L/C.

Simply put, the bank acts as a payment guarantor, but payment will only be made when the documents are complete and fully compliant.

Characteristics of a Letter of Credit (L/C)

Key Characteristics of a Letter of Credit (L/C)

• Independent from the sales contract: The bank deals only with documents and does not intervene in disputes related to the goods.
• Document-based payment: “Payment against documents” – payment is made only when the documents comply with the L/C requirements.
• Conditional commitment: Even a small discrepancy in the documents may lead to payment refusal.
• Governed by UCP 600 rules issued by the International Chamber of Commerce (ICC).

Common Types of Letter of Credit (L/C)

According to international practice, if an L/C does not explicitly state that it is “revocable,” it is automatically considered “irrevocable.” (non-revocable).

• For the Exporter:

• The bank guarantees payment if the documents comply with the L/C terms.
• Reduces the risk of non-payment from the buyer.
• The L/C can be discounted to obtain working capital financing.

• For the Importer:

• Payment is made only when the seller presents the required documents.
• Better control over delivery terms and conditions.
• Enhances credibility with international partners.

Risks and Important Considerations

• Goods may not match reality: Banks only examine documents, not the actual goods.
• High costs and deposit requirements: Importers may need to deposit 10–100% of the contract value.
• Document discrepancies: Even small errors in documents can lead to payment refusal by the bank.

Businesses should carefully review the L/C terms and prepare the document set with absolute accuracy.

Basic Contents of a Letter of Credit (L/C)

• L/C number, date of issuance, and place of issuance.
• Type of Letter of Credit: (Irrevocable, Confirmed, Revolving, Transferable, etc.).
• Information of the parties involved: Applicant (buyer), Beneficiary (seller), Issuing Bank, Advising Bank, etc.
• Payment value and currency.
• Validity period and document presentation deadline.
• Delivery conditions: (Incoterms, port of loading – port of discharge, mode of transport).
• Goods details: product name, quantity, weight, specifications.
• Required document list: commercial invoice, bill of lading (B/L), certificate of origin (CO), insurance documents, packing list, etc.
• Payment commitment of the issuing bank.
• Bank charges, dispute settlement clauses, and transferability provisions.

L/C Payment Process (6 Basic Steps)

1. The buyer requests the bank to issue a Letter of Credit (L/C).
2. The issuing bank sends the L/C to the advising bank.
3. The advising bank forwards the L/C to the seller (beneficiary).
4. The seller ships the goods and submits the required documents.
5. The bank examines the documents.
6. If the documents comply → payment is made; if discrepancies occur → they are handled according to agreement.

The Role of Logistics Companies in L/C Payments

In practice, most L/C discrepancies arise from transport documents, such as the bill of lading, cargo description, vessel departure date, and ports of loading and discharge.

Therefore, choosing an experienced logistics provider is a crucial factor in minimizing payment risks under an L/C transaction.

Supporting Businesses

At HP Log, we provide support in:

• Checking transport documents to ensure full compliance with L/C requirements
• Monitoring bookings and document presentation deadlines
• Coordinating with banks and international partners
• Ensuring shipments and payments are completed on schedule
• Understanding L/C correctly not only helps businesses ensure secure payments, but also strengthens risk management in import–export operations.

Hiểu đúng L/C không chỉ giúp doanh nghiệp an toàn trong thanh toán, mà còn nâng cao năng lực quản trị rủi ro trong xuất nhập khẩu.

If your company is conducting international transactions using L/C payment methods and needs a reliable logistics partner, please contact HP Log via hotline 0913472492 or email info@hplog.com.vn for detailed support.