The exporter's oldest nightmare: goods on the water, buyer gone silent. The letter of credit exists to end it — a bank's promise replacing the buyer's, payable against documents, governed by rules (UCP 600) that every bank on earth speaks. But LCs protect only exporters who understand their machinery: banks pay against paper, not cargo, and a comma-level discrepancy converts your guarantee into a negotiation. Here is the working knowledge.
How an LC actually works
- The flow: buyer applies to their bank (issuing bank) → LC issued favouring you, advised through your bank (advising bank) → you ship and present the stipulated documents → documents comply → the bank must pay, buyer's mood irrelevant
- The golden principle: banks deal in documents alone (UCP 600's autonomy) — compliant documents get paid even if the buyer protests; discrepant documents don't, even if the goods are perfect
- Sight vs usance: payment on presentation vs at tenor (30/60/90 days — buyer credit with bank protection); usance LCs discount easily for immediate cash
- Confirmation: your own bank adds its guarantee atop the issuing bank's — buy it when the issuing bank/country carries risk (the confirmation fee is country-risk insurance)
Reading the LC before you nod
Every LC field is a compliance obligation you're accepting: documents required (invoice, transport document, packing list, certificates — can you actually obtain each, exactly as worded?), latest shipment date and expiry (with the 21-day presentation window default — your document-assembly speed is a term), partial shipment/transshipment permissions (route reality versus LC text), goods description (your invoice must mirror it verbatim — 'as per proforma 123' beats poetic descriptions), Incoterms alignment (CIF LCs demand insurance documents; FOB ones don't), and the charges/quirks (whose account, any strange clauses — LCs requiring buyer-countersigned inspection certificates quietly hand control back to the buyer; negotiate them out). The discipline: review draft LCs against a checklist before issuance, request amendments before shipping — amendments after shipment are pleading, not negotiating.
Most first presentations carry discrepancies — typos between documents, late presentation, description mismatches, missing signatures — and each discrepancy converts 'bank must pay' into 'buyer may waive'. The defence: one person owns document preparation against the LC checklist; every document cross-checked for internal consistency (amounts, weights, marks identical everywhere); presentation days early, never at expiry; and your bank's document-checking used before formal presentation. Exporters with clean-presentation discipline treat LCs as guarantees; the rest experience them as document lotteries.
Costs and when LCs earn them
- The fee stack: issuance (buyer-side), advising (₹2–5k range), confirmation (0.5–2%+ per annum by country risk), negotiation/discounting charges, amendment fees — all-in exporter-side costs commonly 0.5–1.5% of value
- Insist on LCs when: new buyers, risky geographies, large single exposures, made-to-order goods (your fabric dyed in their colours has no salvage market)
- Relax toward open account/advance mixes when: relationship history, export credit insurance (ECGC cover as the alternative protection), or competitive pressure demands — with limits per buyer
- The middle instruments: documentary collections (D/P, D/A — cheaper, bank-handled, but no payment guarantee) for mid-trust relationships
Working the LC for cash flow
An LC in hand is bankable paper: pre-shipment — packing credit against the LC finances production; post-shipment — negotiation/discounting converts usance LCs into immediate funds at fine rates (the issuing bank's risk, not yours, prices the discount); and clean LC track records build your bank limits faster than balance sheets do. Combine with the exporter's stack — ECGC policies covering the non-LC book, interest-equalisation-scheme pricing on export credit where in force — and receivables risk becomes a managed portfolio rather than a nightly worry.
How Aidwish helps
Aidwish supports exporters on payment security — LC checklists and draft reviews, document-preparation SOPs, bank coordination for confirmation/discounting, and the LC-vs-insurance-vs-terms decision per buyer — so the promise on paper survives the presentation desk.