As part of the International Trade Fundamentals webinar series, Head of TradeWindow Academy, Lucia Trandafir, hosted an insightful session exploring the role and process of the Letter of Credit (LC) in international trade.

Letter of Credit plays a crucial role in global trade transactions, particularly for exporters seeking payment security and for importers managing risk. This session unpacked the fundamentals of how the LC works, the parties involved, best practices for compliance, and how TradeWindow’s digital tools, TradeWindow Prodoc and TradeWindow Cube, simplify LC processing from start to finish.

What is a Letter of Credit?

A Letter of Credit is an undertaking issued by a bank on behalf of a buyer (known as the applicant) to pay a seller (the beneficiary) once the required shipping and commercial documents have been presented in compliance with the LC terms.

In essence, it shifts the payment risk from the buyer to the bank. For exporters, an LC offers a high level of security (second only to prepayment) while assuring importers that payment will only be made once agreed documentation is provided.

At least two banks are involved in every LC transaction:

• The issuing bank, which issues the LC on behalf of the buyer.
• The advising bank, which notifies the seller of the LC.

The advising bank can commonly be the confirming and negotiating bank, but other banks can also be part of the LC.

Benefits and Challenges

Letters of Credit are governed by the UCP 600 rules, ensuring uniform interpretation across borders. They allow trade with markets where currency controls or payment regulations are stringent and provide a backup in the form of standby LCs if payment issues arise.

However, LCs can be time-consuming and costly, especially for the buyer. They involve complex documentation and strict compliance requirements. Any small discrepancies can delay or even prevent payment.

The LC Process: From Contract to Payment

Every LC transaction begins with a sales contract that defines the payment terms. Once the buyer’s bank issues the LC, it is advised to the seller, who must review and accept it before shipping any goods.

Many exporters operate under a “clean LC” policy, meaning they only proceed with shipment once all LC conditions are confirmed as compliant.

After shipment, the seller prepares the necessary documents (such as the commercial invoice, packing list, bill of lading, and certificate of origin) and presents them to the bank for compliance checking. Once the documents are accepted, the issuing bank remits the payment to the advising bank and releases the documents to the buyer for cargo collection.

Best Practices for Exporters

Below are several key recommendations to help exporters manage LC transactions efficiently:

1. Select the right type of LC – Always ensure the LC is irrevocable and that its payment terms (sight or term) align with your sales contract.
2. Review the LC carefully – Verify that all terms match your contract and avoid ambiguous or unrealistic conditions.
3. Confirm documentation requirements – Request amendments for any documents you cannot provide or that are incorrectly specified.
4. Prepare documents meticulously – Even minor errors in spelling, quantity, or date can lead to payment delays.
5. Observe all deadlines – Note the LC validity date, latest shipment and presentation dates and consider time zone differences if submitting to an overseas bank.
6. Work closely with your bank – Use pre-check services and seek expert guidance on document compliance.
7. Stay informed on UCP 600 – These international rules underpin how all documentary credits are handled.
8. Manage costs and risks – Understand the fees involved and negotiate which party is responsible for each.

Lucia noted, “ On the point of documentation requirements, if the letter of credit asks for a certificate of origin issued by the ‘Chamber of Commerce’, you can ask for this statement to be amended. Remove ‘the Chamber of Commerce’ in favour of including that a compliant certificate of origin will need to be provided. This will give you flexibility to request your certificate of origin from any accredited provider.”

Streamlining LC Management with TradeWindow Prodoc and TradeWindow Cube

Lucia demonstrated how TradeWindow Prodoc and TradeWindow Cube make managing the Letter of Credit easier, faster, and more accurate.

In Prodoc, exporters can:

• Upload an LC directly from a bank-issued text file.
• Automatically validate applicant and beneficiary details.
• View all LC data segmented into clear, structured fields.
• Link LCs to export transactions so all documentation aligns automatically.
• Track amendments, expiry dates, and the remaining LC value in real time.

Once documentation is ready, exporters can use TradeWindow Cube to securely share draft documents with their banks for pre-checking. This collaborative feature allows both sides to review, amend, and approve documents digitally, reducing courier delays and avoiding discrepancies before official presentation.

Lucia noted, “With Prodoc and Cube working together, exporters can manage their Letter of Credit process from issuance to payment in one digital workflow, ensuring compliance and minimising costly delays.”

If you’d like to learn more about how TradeWindow solutions can help streamline your trade documentation and Letter of Credit processes, please get in touch with your TradeWindow Customer Service Manager or visit tradewindow.io.