A letter of credit puts a bank's promise behind the buyer's, and the bank pays only against complying documents
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A letter of credit commits the buyer's bank to pay the seller once the seller presents documents that match the credit, under ICC rules that have stood since July 2007.
Terms like this have a quick explainer. Tap or hover on them.
01 · The promise
The seller swaps the buyer's credit risk for a bank's
A , or LC, is a bank's promise to pay the seller. The bank makes the promise on behalf of the buyer. It pays only if the seller meets the terms of the credit. That is how the US International Trade Administration (ITA) defines it in its Trade Finance Guide, published in July 2022.
So the seller no longer depends on the buyer alone to pay. It can look to a bank.
Each party on a credit has a name, as the ICC Academy explains. The is the buyer, or importer. It asks for the credit to be issued. The is the seller, or exporter. The credit is issued in its favor. The UK Supreme Court quoted this definition from the rules in Taurus Petroleum v SOMO.
Banks fill the other roles. The writes the credit at the buyer's request. The passes the credit on to the seller, at the issuing bank's request. The is the bank where the credit can be used. It can be any bank if the credit says so. A adds its own promise on top of the issuing bank's.
When does a letter of credit fit? The ITA recommends it for higher-risk deals and for new or less-established trade relationships. It fits when the seller is happy with the creditworthiness of the buyer's bank.
02 · The flow
Eight steps take a credit from the buyer's application to the release of documents
The ITA guide shows a letter of credit in eight steps. First, the buyer applies to its own bank. The bank checks the buyer's creditworthiness, meaning how likely the buyer is to pay. At the end, the buyer's bank hands over the documents. The buyer then uses them to collect the goods.
The documents protect the buyer too. They are evidence that the goods were shipped as agreed, the ITA notes.
Figure 1 · Interactive
Follow a letter of credit from application to payment
Tap a credit type to walk through each step. The last step shows who ends up holding the goods and who holds the cash.
Sources: US International Trade Administration, Trade Finance Guide, 2022 edition, Chapter 4, pages 10 to 11; ICC Academy, UCP 600 article 2 definitions; UK Supreme Court, Taurus Petroleum v SOMO [2017] UKSC 64; High Court, Deutsche Bank v CIMB [2017] EWHC 3380 (Comm). Steps marked structural in Tabs B and C are the Research Desk's sequencing.
03 · Documents decide
The bank checks documents, not goods, and a mismatch can stop payment
The bank pays only if the seller's documents match the terms of the credit. Its duty to pay depends on that alone, according to the ITA.
The seller hands its documents to the bank. This is called a . When every document matches, it is a , and the bank pays. When something does not match, that is a . A discrepancy may mean the seller is not paid, the ITA warns.
Banks check documents against a shared standard. It is called , short for International Standard Banking Practice. Its 2023 edition collects the practices banks use to prepare and check documents under a credit. It is read together with the main rules, UCP 600, according to the ICC.
The rules also bind the bank that does the checking. A bank that wants to refuse must follow article 16 of UCP 600. That includes sending a , which lists each discrepancy. A bank that does not follow article 16 cannot later claim the documents fail to comply. The Court of Appeal set this out in Fortis Bank and Stemcor v Indian Overseas Bank, decided January 31, 2011. The court also held that a bank that chooses to return the documents must do so with reasonable promptness, meaning without delay.
04 · Sight, usance, confirmed
Sight pays on presentation, usance pays later, and confirmation adds a second bank
To a credit means to pay under it. The ICC Academy lists three ways. The bank can pay at sight, meaning straight away. It can give a , a promise to pay on a set later date, and pay then. Or it can accept a , a written order to pay, and pay it when it falls due.
That gives two main kinds of credit. A pays as soon as the documents comply. A pays later, at maturity, the date the payment falls due. In Taurus Petroleum v SOMO, for example, the credits paid 30 days after the date. The bill of lading is the receipt the carrier issues for the goods.
adds a second bank's promise. The confirming bank gives a definite undertaking, on top of the issuing bank's, to honor or negotiate a complying presentation, per the ICC Academy. In , the bank buys the draft or documents and pays the seller early. The seller normally asks for confirmation when it agrees the sale. Sellers ask for it to cover three risks: the issuing bank, the buyer's country and the documents.
The seller gains greater protection when a second bank, typically the advising bank, confirms the credit, the ITA notes. The ICC Academy also describes . Here the advising bank adds a conditional payment guarantee in a private deal with the seller. The issuing bank does not know about it.
The confirming bank then looks to the issuing bank to be repaid. In Deutsche Bank v CIMB, Deutsche Bank was the confirming bank on credits that financed Indian cotton trades. It claimed repayment from CIMB, the issuing bank. The High Court gave judgment for US$9,959,452.57.
The calculator below shows how the costs of a credit add up. It counts interest on a 360-day year. That is the standard US money market , as used by the ARRC and the Federal Reserve.
Figure 2 · Try it
What a letter of credit costs on paper
Set the face value, validity and usance period, and toggle confirmation. The result adds fees and the cost of funding the usance period.
Validity, days from issue to expiry
Issuance fee per 90-day period (illustrative)
Confirmation fee per 90-day period (illustrative)
Usance period, days (0 = sight)
Issuance and confirmation fees
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Usance interest at 6.00% a year
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Total cost, with US$500 flat fees
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Formula: fee periods = validity divided by 90, rounded up; issuance fee = face x rate x periods; confirmation fee = face x rate x periods; usance interest = face x annual rate x usance days / 360; total = sum plus flat fees. The annual rate is fixed at 6.00% and flat fees at US$500, both illustrative.
Our Research Desk used simple interest on a 360-day year for the usance period and per-period fees for issuance and confirmation. The rates shown are for illustration and are not Ossiano pricing.
This calculator explains the concept only. Actual fees vary by bank, country, tenor, applicant credit standing and the documents required.
05 · The rulebook
UCP 600 has set the rules for letters of credit since 2007
Most credits follow , a set of rules written by the International Chamber of Commerce (ICC). The ICC's banking commission approved it on October 25, 2006. It took effect on July 1, 2007, according to the ICC. The ICC first published these rules in 1933. It revised them in 1951, 1962, 1974, 1983 and 1993.
Two more rule sets sit beside UCP 600. ISBP covers how banks check documents. The covers documents presented in electronic form. Its current version is Version 2.1, ICC Publication No. 823E. The ICC calls it a supplement and digital companion to UCP 600, on a page dated June 29, 2023.
The ICC says Version 2.1 is neither a revision nor an update. It brings the eUCP into line with , a UN model law that lets electronic trade records be used legally.
The rules are stable. The ICC Banking Commission published its UCP/ISBP Action Plan 2026-2027 on July 31, 2026. It focuses on clarification, interpretation, transport practice, standby alignment and education. It does not plan a revision of UCP 600.
Figure 3
The rules that sit behind a documentary credit
Each row is an ICC rule set with its current version and effective date.
Source: International Chamber of Commerce, UCP 600, ISBP and eUCP product and library pages; ICC Digital Library, UCP/ISBP Action Plan 2026-2027, July 31, 2026.
06 · Courts and autonomy
Courts keep the credit separate from the sale, even where the buyer committed fraud
A letter of credit stands apart from the sales contract. This is the . Banks deal with documents, not with the goods or how the deal went. Three court cases show how it works.
In Credit Agricole CIB v PPT Energy Trading [2023] SGCA(I) 7, an unconfirmed credit of about US$23.66 million stayed payable. This held even though the buyer's fraud had led the bank to issue it. The court also awarded CACIB US$10,319,470.81 under a , a written promise to cover another party's loss. The promise broken was a warranty of marketable title, meaning the goods could be sold free of other claims.
Fraud in the documents themselves is treated differently. Winson Oil Trading v OCBC and SCB [2024] SGCA 31 concerned circular trades of 780,000 barrels of gasoil on March 27, 2020. The Court of Appeal of Singapore upheld the banks' refusal to pay. It held that fraud includes statements made recklessly, without caring whether they are true or false.
Procedure matters too. Voest-Alpine Trading v Bank of China (2002) concerned a US$1.2 million credit under UCP 500, an earlier version of the rules. The US Court of Appeals for the Fifth Circuit found the bank's refusal notice was not effective. So the bank lost its right to refuse the documents.
Read more in our guide to fraud controls in trade finance.
07 · Scale
Letters of credit cover about one-sixth of total trade
The BIS Committee on the Global Financial System estimates that letters of credit cover about one-sixth of total trade. It puts bank-intermediated trade finance in 2011 at US$6.5 to 8 trillion. Bank-intermediated means a bank stood in the middle of the deal. Around US$2.8 trillion of that was letters of credit. The estimates were published in January 2014 and use 2011 data. Read them as a dated benchmark.
The ICC Trade Finance Pulse Check of September 2026 surveyed over 100 practitioners. Around 40% of surveyed banks report falling LC margins. A margin is what the bank earns on the credit.
The EBRD's trade facilitation program started in 1999. It reached its 20,000th transaction in 2017. By then it worked with more than 100 issuing banks and over 800 confirming banks, according to an EBRD news release of March 28, 2017.
08 · Ossiano view
The letter of credit endures because its rules are settled and its documents can be tested
OBSERVATION 01
A stable rulebook
UCP 600 has applied since July 1, 2007. The ICC's 2026 to 2027 plan centers on clarification and interpretation. Parties can price and document a credit against rules that have held for almost two decades.
OBSERVATION 02
Confirmation widens the circle of acceptable banks
A second bank's confirmation gives the seller greater protection. The EBRD program alone counted over 800 confirming banks. Sellers can reach buyers whose local banks they do not yet know.
OBSERVATION 03
Document discipline is where the value sits
The bank pays only when the documents comply, and ISBP sets out how documents are checked. Getting the documents right the first time is the step both parties control.
Summary
A letter of credit swaps the buyer's promise for a bank's, paid against documents
A letter of credit is a bank's promise, made for the buyer, to pay the seller if the credit's terms are met. The bank's duty to pay depends only on whether the seller's documents comply. A sight credit pays as soon as the documents comply. A usance credit pays later, at maturity, through a deferred payment undertaking or an accepted draft. A confirming bank can add its own promise.
Most credits run under UCP 600, in force since July 1, 2007. ISBP guides how documents are checked, and eUCP Version 2.1 covers electronic documents. Courts keep the credit separate from the sales contract.
Related guides: the payment terms spectrum, documentary collections, standby letters of credit vs bank guarantees, the bill of lading, the trade documents checklist, how trade finance is priced and fraud controls in trade finance. Instrument cards: letter of credit (sight), letter of credit (usance, acceptance, deferred payment), confirmed letter of credit, transferable letter of credit, back-to-back letter of credit, revolving letter of credit, red clause letter of credit and standby letter of credit. Every term is defined in the Trade Finance Glossary.
For questions on how these shifts affect existing or planned trade finance exposures, contact the Ossiano Research Desk.
Sources
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), July 2022. Supports: LC definition; payment conditioned solely on documentary compliance; recommendation for higher risk or new relationships; the eight-step illustrated LC transaction (Chapter 4, pages 10 to 11) and step 1 credit evaluation; discrepancy risk; importer protection; confirmation by a second bank; publication date.
- ICC Academy (David Meynell, ICC Banking Commission), Introduction and Types of Documentary Credit, undated. Supports: definitions of honor, applicant, beneficiary, issuing, advising and nominated bank, and confirmation; when and why confirmation is requested; silent confirmation.
- UK Supreme Court, Taurus Petroleum Ltd v State Oil Marketing Company [2017] UKSC 64, October 25, 2017. Supports: credits available by deferred payment at 30 days from bill of lading date (para 9); UCP 600 article 2 definition of beneficiary (para 19).
- 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: UCP 600 article 16(f) preclusion (para 23); return of documents with reasonable promptness (para 41).
- High Court of England and Wales, Commercial Court, Deutsche Bank AG, London Branch v CIMB Bank Berhad [2017] EWHC 3380 (Comm), December 14, 2017. Supports: confirming bank's reimbursement claim against the issuing bank (para 1); judgment for US$9,959,452.57 (para 59).
- International Chamber of Commerce, ICC's new rules on documentary credits now available, December 4, 2006. Supports: UCP 600 approval on October 25, 2006; implementation on July 1, 2007; UCP revision history from 1933.
- ICC Digital Library, ICC Banking Commission 2026-27 Action Plan next steps, July 31, 2026. Supports: the UCP/ISBP Action Plan 2026-2027 emphasis on clarification rather than revision.
- International Chamber of Commerce, International Standard Banking Practice (ISBP), ICC Knowledge 2 Go, 2023. Supports: ISBP 2023 edition (P821E) and its scope.
- International Chamber of Commerce, eUCP, ICC Publication No. 823E, rules PDF, 2023. Supports: eUCP Version 2.1 (article e1).
- International Chamber of Commerce, eUCP version 2.1: ICC Uniform Customs and Practice for Documentary Credits, June 29, 2023. Supports: eUCP as a supplement and digital companion to UCP 600; page date.
- ICC Digital Library, ICC news item on eUCP Version 2.1, July 5, 2023. Supports: Version 2.1 as neither a revision nor an update, aligning the eUCP with MLETR.
- Court of Appeal of Singapore, Credit Agricole CIB v PPT Energy Trading [2023] SGCA(I) 7, October 24, 2023. Supports: autonomy of a credit of approximately US$23.66 million despite the applicant's fraud; award of US$10,319,470.81 on the letter of indemnity warranty.
- Court of Appeal of Singapore, Winson Oil Trading Pte Ltd v OCBC and SCB [2024] SGCA 31, 2024. Supports: circular trades of 780,000 barrels of gasoil on March 27, 2020; refusal to pay upheld; the recklessness test for fraud (para 40).
- US Court of Appeals for the Fifth Circuit, Voest-Alpine Trading USA Corp v Bank of China, No 01-20363, April 23, 2002. Supports: US$1.2 million credit under UCP 500; ineffective refusal notice forfeited the right to refuse documents.
- Bank for International Settlements, Committee on the Global Financial System, CGFS Papers No 50, Trade finance: developments and issues, January 2014. Supports: LCs cover about one-sixth of total trade (Executive Summary); 2011 flow of US$6.5 to 8 trillion, around US$2.8 trillion LCs (page 8).
- International Chamber of Commerce, ICC Trade Finance Pulse Check, September 2026, September 2026. Supports: over 100 practitioners surveyed; around 40% of surveyed banks reporting declining LC margins.
- European Bank for Reconstruction and Development, EBRD news release on the trade facilitation program milestone, March 28, 2017. Supports: program established 1999; 20,000th transaction in 2017; more than 100 issuing and over 800 confirming banks.
- Alternative Reference Rates Committee, SOFR "In Arrears" Conventions for Syndicated Business Loans, July 22, 2020. Supports: Actual/360 as the standard US money market day count, used in Figure 2.
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: money market rates annualized on a 360-day year, used in Figure 2.
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