What Is LC? Letter of Credit Payment

Quick Answer

A Letter of Credit (LC, also L/C) is a financial instrument issued by a bank on behalf of the buyer, guaranteeing payment to the seller upon presentation of compliant shipping and trade documents. The bank substitutes its creditworthiness for the buyer’s, giving the seller assurance of payment. LCs are governed by the ICC Uniform Customs and Practice for Documentary Credits (UCP 600) and are standard payment instruments for international piping material orders above $50,000-$100,000.

How an LC Works

Step	Activity	Parties Involved
1	Buyer and seller agree on LC payment terms in the purchase order	Buyer, seller
2	Buyer applies for LC at their bank (issuing bank)	Buyer, issuing bank
3	Issuing bank issues LC and sends it to seller’s bank (advising/confirming bank)	Issuing bank, advising bank
4	Advising bank notifies seller that LC is in place	Advising bank, seller
5	Seller manufactures and ships goods per PO and LC terms	Seller
6	Seller presents shipping documents to advising bank	Seller, advising bank
7	Advising bank checks documents for compliance and forwards to issuing bank	Advising bank, issuing bank
8	Issuing bank reviews documents; if compliant, releases payment	Issuing bank
9	Buyer receives documents from issuing bank and claims goods at destination	Buyer

LC Document Requirements

The LC specifies exactly which documents the seller must present. Any discrepancy—wrong date, missing document, incorrect description—can delay or block payment.

Document	Purpose	Common Discrepancies
Bill of lading (original)	Proof of shipment, document of title	Late shipment date, claused B/L (cargo damage noted)
Commercial invoice	Price, quantity, description matching LC	Description mismatch, price exceeding LC amount
Packing list	Weights, dimensions, marks	Missing bundle numbers, weight discrepancy
Certificate of origin	Country of manufacture	Origin country not matching LC requirement
Mill test certificates	Material compliance per EN 10204 3.1/3.2	Heat numbers not matching B/L cargo description
Insurance certificate	Cargo insurance (if CIF or CIP)	Coverage amount less than 110% of invoice value
Inspection certificate	Third-party inspection release	Inspector not from specified agency

Types of Letters of Credit

Type	Description	Risk Level for Seller
Irrevocable LC	Cannot be amended or cancelled without all parties’ consent. Standard type	Low
Confirmed LC	Advising bank adds its own guarantee alongside the issuing bank	Lowest (double bank guarantee)
Unconfirmed LC	Only issuing bank guarantees payment	Medium (depends on issuing bank’s creditworthiness)
Sight LC	Payment released immediately upon compliant document presentation	Low (fastest payment)
Usance (deferred) LC	Payment released after a specified period (30, 60, 90, 180 days)	Medium (payment delayed but bank-guaranteed)
Transferable LC	Seller can transfer LC to a sub-supplier or manufacturer	Useful for trading companies
Standby LC	Acts as a guarantee; only drawn if buyer defaults on payment	Used as security, not primary payment method

LC Costs

Cost Element	Typical Range	Paid By
LC issuance fee	0.5-2.0% of LC value per year	Buyer
Advising fee	0.1-0.3%	Seller
Confirmation fee	0.3-1.5% per year (depends on country risk)	Seller or buyer (per agreement)
Amendment fee	$50-200 per amendment	Party requesting the change
Discrepancy fee	$50-100 per discrepancy	Seller
Negotiation fee	0.1-0.25%	Seller

Common Mistake

Presenting documents after the LC expiry date or the latest shipment date. UCP 600 requires documents to be presented within 21 days of shipment and before the LC expiry date. A shipment that clears the port on time but whose documents reach the bank one day after expiry is non-compliant. Track all LC dates—latest shipment date, document presentation deadline, and expiry date—from the moment the LC is issued.

LC vs Other Payment Methods

Payment Method	Security for Seller	Security for Buyer	Cost	Speed
Advance payment	Highest (money before shipment)	Lowest	Low	Fast
Letter of credit	High (bank guarantee)	High (payment tied to documents)	Medium-High	Medium
Documentary collection (D/P)	Medium (documents through bank, no guarantee)	Medium	Low	Medium
Open account	Lowest (trust-based)	Highest (pay after receipt)	Lowest	Slow

For EPC piping procurement, the LC is the standard payment instrument for international orders. It balances risk between buyer and seller and is often required by project financing agreements. The Incoterms specified in the LC must match the purchase order. For the complete procurement document flow from RFQ to payment, see the detailed guides.

Read the full guide to pipe classes and specifications