LC (Letter of Credit)

In practice

How an LC runs on an order

After you and the supplier agree the sales terms, you apply to your bank to open an LC in the supplier's favor. Your bank drafts the credit from those terms and sends it to the supplier's bank, which passes it to the supplier. The supplier ships and hands the required documents to its bank. The bank checks them against the credit and sends complying documents to your bank. Your bank pays, and releases the documents you need to claim the goods and clear customs¹.

The U.S. International Trade Administration describes this as protection for both sides. The seller gets a bank's commitment. You have no obligation to pay until the documents show the goods were shipped as agreed².

Why the documents must match exactly

A bank looks at paper, not at cartons. UCP 600 has separate articles on "Credits v. contracts", "Documents v. goods, services or performance" and the standard for examining documents³, and ICC has published guidance on the long-running debate over "strict compliance"⁴. The practical result: a misspelled name, a wrong port or a date outside the credit can hold up payment. Required documents are "detailed and prone to errors and discrepancies", and fixing them costs time and fees¹.

Mistakes can start on your side too. Bangladesh Bank's foreign exchange guidelines (2018 edition) tell Bangladeshi banks to check that the Incoterm in an LC is accurate before advising it. If goods will be handed to your nominated carrier before loading, the guidelines point to FCA rather than FOB, and they ask banks to report any inconsistency to the issuing bank so the credit can be amended⁵. Because a bank pays against documents, an LC alone tells you nothing about quality. If quality matters, ask your bank whether an inspection certificate can be one of the required documents. See pre-shipment inspection.

Types you will meet in Bangladesh trade

UCP 600 covers confirmed credits, where a second bank adds its own undertaking, and transferable credits³. In the garment sector you will also hear about back-to-back LCs. Bangladesh Bank's Guidelines for Foreign Exchange Transactions (2018 edition) let export-oriented factories operating under a bonded warehouse system open import LCs for their inputs against the master export LC they received from a buyer. The factory must hold a valid registration with the Office of the Chief Controller of Imports and Exports and a valid bonded warehouse license⁶. The paperwork follows the chain: BKMEA lists the export LC or contract and the back-to-back LC copy among the documents its knitwear members submit for a utilization declaration⁷.

Cost

LCs are labor-intensive and can be relatively expensive because of bank fees¹. Charges vary by bank, so ask yours what it charges and agree with the supplier who pays which fees before you apply.

Related terms

• TT (Telegraphic Transfer): a direct bank transfer, often split into a deposit and a balance.

• Export documents from Bangladesh: the commercial invoice, transport documents and certificates a shipment needs, several of which UCP 600 has specific articles on.

• ERC (Export Registration Certificate): the exporter registration that Bangladeshi banks check.