LC Payment: Meaning, Process, Types & Alternatives
Suppose you get an international client after lots of negotiations and bargaining. But the buyer wants to be paid via a Letter of Credit. However, the buyer demands payment through a Letter of Credit. At this stage, many exporters begin to doubt.
You may begin to question the costs, document needs, and time required in this process. This concern becomes stronger for service exporters managing digital or recurring payments. The process may appear complex and time consuming.
This article explains how LC payments work, where they are useful, and when they are not. It further compares their cost and complexity with simpler choices for global businesses.
TL;DR - Summary
- What it is: - A Letter of Credit is a bank assurance that ensures the seller receives payment when all required documents are correctly presented.
- Risk Reduction: - LC payments reduce buyer and country risk but come with high costs and need strict document compliance.
- Best Use Cases: - They are applicable in high-value goods exports and new or higher-risk trade partners.
- When Not Required: - In case of low-value transactions or service exports, less hassle modes of payment, such as wire transfers, are more appropriate.
- Alternative: - Services such as Skydo offer a faster, cheaper way to make international payments without going through the LC process.
What is Letter of Credit?
A Letter of Credit (LC) is a payment guarantee issued by a bank on behalf of a buyer, mainly used in international trade. It ensures that the seller will receive payment, as long as they meet the agreed conditions.
In simple terms, the bank steps in as a trusted middle party. Instead of relying on the buyer’s promise, the seller relies on the bank’s assurance. However, it also needs strict compliance with document rules.
For example, if a buyer imports goods, the bank will only release payment to the seller after the seller submits required documents, such as shipping and invoice papers, within the agreed timeline. If these conditions are met, the bank pays the seller even if the buyer fails to pay.
To see how an LC works, it is necessary to learn the core parties involved in this process:
- Applicant: Buyer who requests the LC
- Beneficiary: Exporter who receives the payment
- Issuing Bank: The buyer’s bank issuing the LC
- Advising Bank: The exporter’s bank checks and forwards the LC
LC transactions follow UCP 600 rules, which are accepted standards for documentary credits. These Uniform Customs and Practices for Documentary Credits rules provide uniform practices across all countries and banks.
Why are LC Payments Important?
A letter of credit assures the settlement once every payment term is completed, but a bank guarantee functions differently, paying compensation only if one party fails to meet obligations
LCs offer several important advantages that strengthen payment security:
- Payment Assurance: Exporters receive payment once they submit correct documents according to LC terms. This lowers the likelihood of non-payment clearly.
- Risk Transfer to Bank: The payment duty passes from the buyer to the issuing bank. This lowers dependence on the buyer’s financial situation.
- Enables Trade With New Buyers: LC payments help exporters access new markets while keeping risk low. This proves helpful when working with unknown or first-time customers.
- Reduced Country Risk: Exporters trading with unstable regions can rely on bank-backed payment assurance. This creates more confidence in cross-border transactions.
- Funding Options: LCs also offer funding options. Exporters can use LC documents to secure working capital via discounting.
About 33.1% of global trade finance uses LCs, mainly for large-value goods transactions today.
Who Needs a Letter of Credit?
✓ Use LC payments when
Higher risk justifies the cost and complexityGoods exporters
Physical goods need secure payment assurance before release
High-value deals
Large shipments where non-payment would be damaging
New buyer relationships
Bank-backed assurance builds trust with first-time customers
High-risk markets
Buyers in politically or economically unstable countries
✗ Skip LC payments when
Simpler methods are faster and cheaperFreelancers and service exporters
Complex trade finance instruments not designed for services
IT and SaaS companies
Recurring clients reduce the need for strict guarantees
Low-value transactions
Fixed LC fees can eat into margins on smaller deals
Trusted long-term clients
Established relationships lower the need for bank security
At the same time, the decision to use an LC should be based on a careful balance between risk and cost. If the buyer is reliable and operates in a stable country, basic payment methods such as wire transfers can offer faster processing and lower overall expenses.
A Real-World Example of LC Payment
Hover over any step to expand
⚠ 50–70% of LCs rejected on first presentation
A basic letter of credit example shows how the process works in real trade situations. An Indian textile exporter is delivering goods worth $100,000 to a buyer in Nigeria.
The buyer selects LC because of country risk and starting business interaction. Both parties agree to operate under a bank-backed payment structure.
- Buyer sends an LC application to their bank
- Issuing bank creates the LC and forwards it to the advising bank
- Advising bank notifies the exporter about the LC
- Exporter ships goods as per contract
- Seller provides required documents to the bank
- Banks check documents carefully for accuracy
- Payment is made after successful verification
This complete flow shows the letter of credit process used in global trade.
Delays in LC payments usually occur at specific stages in the process:
- Mistakes during document preparation
- Time required to send physical documents
- Difference checks by banks
Small mismatches found in documents can delay the whole process.
The overall cycle usually takes a few weeks from shipment until payment reaches the exporter’s bank account in India.
What are the Main Types of LC Payments?
Different types of LC payments are designed to suit specific trade situations and risk levels. Each option provides a distinct balance across payment timing, flexibility, and security for exporters and buyers.
Listed below are the commonly used types of Letters of Credit along with their meaning and ideal use cases:
- Sight LC: Payment is made immediately after the bank checks the documents. Good for exporters who want payment quickly after shipment.
- Usance (Deferred) LC: Payment is made after a set period like 30, 60, 90 or 180 days. Helps buyers who need time before making a payment.
- Irrevocable LC: Cannot be changed or cancelled without all parties agreeing. Preferred in trades where both sides need a firm commitment.
- Revocable LC: The issuing bank can cancel or modify this LC without notice. Rarely used due to high risk for exporters.
- Confirmed LC: Another bank guarantees payment in case the issuing bank fails. Suitable for trade with buyers in unstable countries.
- Transferable LC: The credit may be transferred in full or in part to another. Applicable in the case of intermediaries in the trade.
- Back-to-Back LC: A new LC is issued based on an existing one to pay suppliers. Helps exporters who rely on third-party suppliers.
- Standby LC: Serves as a backup in case the buyer does not pay. Often used in long-term contracts or service agreements.
Among these, an irrevocable confirmed LC is regarded as the safest choice for exporters. It cannot be revised without approval and carries an additional guarantee from another bank. This lowers both buyer risk and issuing bank risk.
In practice, Indian exporters most commonly deal with Sight LC and Usance LC, as these types balance payment timing and business flexibility in international trade.
How Much Does an LC Payment Cost?
LC payments include several cost elements that raise total transaction expenses.
These charges arise at different stages of the LC process:
- Issuance Fee: Charged by the issuing bank, usually 0.1% to 2% of the total transaction amount
- Advising Fee: Paid to the exporter’s bank for receiving the LC and checking all details
- Confirmation Fee: Additional cost for extra security from a confirming bank
- Amendment Fee: Applied whenever any changes are made to LC terms after it is issued
- Discrepancy Fee: Charged if the submitted documents have mistakes or do not match
- SWIFT & Courier Charges: Fees for secure messages and physical document transfer between banks
LC Cost Example — $50,000 shipment
Typical fees across the LC process
Issuance fee
1% of transaction value
Advising fee
Exporter's bank checking & forwarding
Confirmation fee
1% — additional bank guarantee
Amendment fee
Per change to LC terms
Discrepancy fee
Per document error found
SWIFT & courier charges
Secure messages + document transfer
LC discounting may add extra cost if early payment is required. Rates often remain within typically 7% to 13% each year.
Even a small document error may add $50–$100 in charges and push payment timelines back by up to two weeks.
LC payments often involve high costs and complex documentation for many exporters. This can reduce profit margins and slow down cash flow cycles.
Skydo offers a simpler way to receive international payments without heavy paperwork. It provides faster settlement and transparent pricing for global businesses.
Pros and Cons of LC Payment
Hover each point to see the detail
✓ Advantages
Payment guarantee
Bank pays once LC conditions are met, even if buyer defaults
Risk transfer to bank
Payment duty shifts from buyer to the issuing bank
Enables new market access
Trade with unknown buyers in new countries while keeping risk low
Funding support
LC documents can secure pre or post-shipment financing
International standards
Governed by UCP 600 — uniform rules across all banks globally
✗ Disadvantages
Higher costs
Multiple bank fees add up quickly compared to a wire transfer
Documentation burden
Error-free documents required within strict deadlines every time
Discrepancy risk
50–70% of LC documents are rejected on first presentation
Slower processing
Full cycle takes 2–4 weeks vs 1–3 days for a wire transfer
Limited use cases
Not suited for services, recurring payments, or small invoices
ICC Banking Commission data shows that 50% to 70% of LC documents are rejected on first presentation because of discrepancies. This confirms the strict rules required in LC transactions.
Many exporters ask, “Is LC payment safe in international trade?” LC payments are safe against buyer default because banks guarantee payment.
Still, they are not entirely risk-free. Mistakes in documents or issues with the issuing bank may still delay or prevent payment.
To clearly understand how this compares with other payment methods, the table below shows the key differences between Letter of Credit (LC) payments and wire transfers (TT):
LC payments are not totally secure from risk. Payment risk still exists if the issuing bank is financially weak or in a restricted region.
How Does Skydo Help?
Skydo simplifies international payment collection for modern exporters and service providers. It removes the need for complex banking procedures and documentation. By this method, firms can receive several benefits in their daily work tasks:
- No LC forms or regulatory hassle
- No errors from mismatched documents
- Get payments quickly through links or invoices
- Receive money in one business day
- Pricing is simple and predictable
This setup benefits freelancers, SaaS companies, and service exporters in operations. It helps improve cash flow and reduces operational effort.
Get started with Skydo to accept international payments easily, with quicker settlements and reduced paperwork requirements for your business needs.
What is the meaning of LC payment in international trade?
An LC payment is a bank-backed payment method used in international trade. The issuing bank assures payment to the exporter after all required documents are submitted properly. This lowers payment failure risk and clearly strengthens overall trust between both sides, especially in cross-border transactions involving new or unknown buyers.
What are the 4 most common types of letter of credit?
Can a bank reject an LC payment due to document discrepancies?
Should freelancers and IT service exporters use LC or TT payments?
How long does it take to receive LC payment in India?
