LC Payment Terms
LC payment terms (Letter of Credit) provide the highest level of payment security in international trade. A Letter of Credit is a written undertaking by the buyer’s bank (issuing bank) to pay the seller a specified amount, provided the seller presents documents that comply exactly with the LC terms. LCs are governed by UCP 600 issued by the International Chamber of Commerce, and are the standard payment method for high-value piping material transactions.
LC Payment Process
| Step | Action | Party |
|---|---|---|
| 1 | Buyer applies for LC at their bank | Buyer + Issuing bank |
| 2 | Issuing bank opens LC and sends to seller’s bank | Issuing bank + Advising bank |
| 3 | Advising bank notifies seller of LC terms | Advising bank + Seller |
| 4 | Seller ships goods and prepares documents | Seller |
| 5 | Seller presents documents to advising/negotiating bank | Seller + Advising bank |
| 6 | Bank examines documents for LC compliance | Advising/Negotiating bank |
| 7 | Compliant documents sent to issuing bank | Advising bank + Issuing bank |
| 8 | Issuing bank pays (or commits to pay at maturity) | Issuing bank |
| 9 | Buyer receives documents and collects goods | Buyer |
Types of Letters of Credit
| LC Type | Description | Risk Level | Cost |
|---|---|---|---|
| Irrevocable LC | Cannot be amended or cancelled without all parties’ consent | Lowest for seller | Standard |
| Confirmed LC | Advising bank adds its own payment guarantee | Lowest possible for seller | Higher (confirmation fee) |
| At Sight LC | Payment upon presentation of compliant documents | Moderate (delays possible) | Standard |
| Usance (Deferred) LC | Payment at a future date (30/60/90/180 days) | Higher for seller | Lower upfront |
| Transferable LC | Can be transferred to a second beneficiary (e.g., manufacturer) | Moderate | Additional transfer fee |
| Standby LC (SBLC) | Used as a guarantee, not primary payment | Depends on structure | 1-2% per annum |
| Revolving LC | Reinstates automatically after each drawing | Moderate | Higher setup cost |
LC Costs
| Cost Element | Typical Range | Paid By |
|---|---|---|
| Issuance fee | 0.1-0.5% of LC value | Buyer |
| Advising fee | $50-200 flat | Seller |
| Confirmation fee | 0.2-1.5% (depends on country risk) | Seller (or buyer) |
| Negotiation fee | 0.1-0.25% | Seller |
| Amendment fee | $50-100 per amendment | Requestor |
| Discrepancy fee | $50-100 per set | Seller |
| SWIFT charges | $30-50 per message | Split |
For a $500,000 piping material order with a confirmed LC, total banking costs may range from $3,000-8,000 (0.6-1.6% of value).
Common LC Discrepancies
The most frequent reasons for document rejection in piping material LCs:
- Late presentation of documents (must be within 21 days of shipment or as specified)
- Bill of lading date after the LC latest shipment date
- Description of goods not matching the LC text exactly
- Missing or incorrect inspection certificates
LC payment terms work alongside Incoterms to define the complete commercial framework. For example, “CIF Jubail, payment by irrevocable confirmed LC at sight” specifies delivery terms, risk allocation, and payment mechanism in a single clause. For simpler payment methods, see TT payment terms and CAD payment terms.
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