Letter of credit (sight)
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A bank promises to pay the exporter once the exporter hands in documents that match the letter of credit.
Terms like this have a quick explainer. Tap or hover on them.
01 · In plain words
The buyer's bank promises to pay you once your documents match the letter of credit
A is a promise from a bank. The importer's bank promises the exporter that it will pay, as long as the exporter meets the terms written in the letter of credit, or LC (US International Trade Administration).
"Sight" means the bank pays once it has checked your documents and found they match the LC. There is no later payment date (ICC Academy). Each bank has up to five banking days to do that check, its (ICC, UCP 600).
For the exporter, the question changes. It is less "will the buyer pay?" and more "is the buyer's bank sound, and are my documents right?" The bank's duty to pay depends only on the documents (US ITA). The bank checks papers only. It does not inspect the goods.
Who is involved
- The importer, called the , asks its bank for the LC.
- The exporter, called the , receives the LC and gets paid.
- The importer's bank, the , makes the promise to pay.
- The exporter's bank, often the , passes the LC on and handles the documents.
- Sometimes a adds its own promise. See Confirmed letter of credit.
02 · How it works
Eight steps take the deal from the importer's request to the goods at customs
Figure 1 · Interactive
A sight letter of credit, step by step
Read down the steps. The last step is where the importer collects the goods.
Source: US International Trade Administration, Trade Finance Guide, July 2022, Chapter 4 (eight-step illustration); ICC Academy on payment at sight.
03 · What it means for you
The exporter relies on the buyer's bank and on getting the papers right, and the importer pays only after seeing proof the goods shipped
Figure 2 · Interactive
What a sight LC means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million sight LC, illustrative bank fees add up to $5,500
This example uses round, made-up numbers to show how the fees build up. The LC stays open for 180 days, but the exporter is still paid at sight. Real fees vary by bank, country and deal.
Figure 3 · Illustrative
Fees on a $1,000,000 sight LC open for 180 days
Illustrative inputs. The total is highlighted.
Made-up rates, worked out by our checking script. Your bank's fees will differ by bank, country and deal.
05 · When to use it
A sight LC suits new or higher-risk deals where the exporter trusts the buyer's bank
Good fit when
- You are selling to a new buyer, or the deal carries higher risk, and you trust the buyer's bank (US ITA).
- You want a bank's promise to pay before you ship.
- As the buyer, you want proof the goods shipped before your money moves.
Another tool may suit better when
- Both sides want little paperwork and low cost. An LC takes work and is relatively expensive (US ITA). Look at open account or a documentary collection.
- You are unsure about the buyer's bank. Ask for a confirmed letter of credit, where a second bank adds its promise.
- The buyer needs time to pay. Look at a usance LC, which pays at a set later date.
06 · Rules and a real case
An LC follows the ICC rules it names, and a court has held a bank to them
When an LC says it follows , those ICC rules apply. They have been in force since July 1, 2007 (ICC). Banks check documents using , 2023 edition (ICC). The , version 2.1, covers documents sent electronically (ICC).
A real case. If a bank refuses your documents, it must follow set steps and act quickly. In Fortis Bank and Stemcor v Indian Overseas Bank, decided on January 31, 2011, the Court of Appeal of England and Wales held that a bank that chooses to send refused documents back must do so with reasonable promptness. Under UCP 600, a bank that skips the refusal steps loses the right to say the documents did not match (Court of Appeal judgment).
Summary
A sight LC gets the exporter paid on matching documents, backed by the buyer's bank
The exporter is paid once the bank finds the documents match the LC. The importer's bank carries the promise, and the importer pays only after seeing proof the goods shipped. The trade-off is paperwork and fees, so it pays to get the documents right the first time.
Related guides: Letters of credit; The payment terms spectrum; The trade documents checklist. Related cards: Confirmed letter of credit; Letter of credit (usance). Every term is in the Trade Finance Glossary.
Sources
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), Chapter 4, July 2022. Supports: definition, the eight-step flow, when a credit fits, its costs and effort, protection for the importer
- ICC Academy, Types of documentary credit: a comprehensive guide, October 21, 2024. Supports: payment at sight, the roles of the parties, confirmation
- International Chamber of Commerce, UCP 600 rules text, ICC Digital Library, undated. Supports: the five banking day examination period
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, in force July 1, 2007. Supports: the rules an LC can follow
- International Chamber of Commerce, International Standard Banking Practice (ISBP), 2023 edition, 2023. Supports: document checking practice
- International Chamber of Commerce, eUCP Version 2.1, June 29, 2023. Supports: electronic presentation
- Court of Appeal of England and Wales, Fortis Bank SA/NV and Stemcor UK Ltd v Indian Overseas Bank [2011] EWCA Civ 58, January 31, 2011. Supports: the real case
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