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The log · Port & regional guides · 23 May 2026 · By Sherif Awad, Owner, GeoMarineHub
Letter of Credit (LC) Basics: A Trade-Finance Guide for Importers and Exporters
What a Letter of Credit is, how documentary credit works, the parties involved, the role of shipping documents, UCP 600, common discrepancies, and how an LC compares to open account and CAD.
Letter of Credit (LC) Basics: A Trade-Finance Guide for Importers and Exporters
What a Letter of Credit is, how documentary credit works,the parties involved, the role of shipping documents, UCP600, common discrepancies, and how an LC compares to openaccount and CAD.
Geomarine Freight Team
For first-time importers and exporters, a Letter of Credit (LC) can feel like the most intimidating document in international trade. In reality it is a simple promise: a bank pays the seller, on the buyer's behalf, once the seller presents the right documents. This guide breaks down how documentary credit works, who the parties are, and why your shipping paperwork is the heart of the whole transaction. If you are still arranging carriage, you can find a forwarder on Geomarine to handle the logistics while the banks handle the money.
What is a Letter of Credit?
A Letter of Credit is a written undertaking by a bank to pay an agreed amount to a seller, provided the seller presents documents that exactly match the terms of the credit. It replaces the buyer's commercial risk with bank risk. The seller no longer worries whether the buyer will pay; the seller only has to satisfy the bank's document requirements. This makes LCs the backbone of trade finance, especially between parties who have never traded before or who operate across high-risk corridors.
The Parties in a Documentary Credit
Four main parties drive every LC. The applicant is the buyer (importer) who asks their bank to open the credit. The beneficiary is the seller (exporter) who will receive payment. The issuing bank is the applicant's bank that issues the LC and carries the payment obligation. The advising bank (usually in the seller's country) authenticates the LC and passes it to the beneficiary. Sometimes a confirming bank adds its own guarantee, giving the seller a local bank to claim from. Understanding who plays which role helps you read the SWIFT MT700 message your bank sends.
Shipping Documents: The Engine of the LC
An LC is settled against documents, not goods, so accuracy is everything. The typical document set includes the Bill of Lading, the commercial invoice, the packing list, and often a certificate of origin and insurance certificate. The Bill of Lading is the most critical because it is the title document for the cargo; if you are unsure how to read one, our guide on explains every field. Because the LC ties payment to delivery terms, your must align with what the credit demands — a mismatch between an FOB sale and a CIF document set is a classic cause of rejection.
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