What is a Letter of Credit (LC)?
A bank-issued guarantee that a buyer's payment will be made to the seller on time and for the correct amount — the gold standard for international and large domestic B2B transactions.
A Letter of Credit (LC) is a document issued by a bank guaranteeing that a seller (supplier) will receive payment, provided they submit the correct shipping documents (bill of lading, packing list, certificate of origin, etc.) within the specified time.
LCs are the primary payment instrument for international trade. In India, they are also used for large domestic industrial transactions (e.g., steel mills selling coils to pipe manufacturers), typically above ₹50 lakh.
Types of LC: Sight LC (payment on document presentation), Usance LC (payment after 30/60/90 days — a deferred LC that acts like trade credit), Revolving LC (for repeat orders), Back-to-Back LC (supplier finances from buyer's LC), and Standby LC (a guarantee rather than a payment mechanism).
The LC process: Buyer applies to their bank (issuing bank) → bank sends LC to supplier's bank (advising/confirming bank) → supplier ships goods → supplier submits documents to their bank → documents verified → payment released. Discrepancies in documents can delay payment.
For domestic B2B on VyaparSethu, Protected Payment (escrow) serves the same purpose as an LC for smaller transactions — it guarantees the supplier gets paid on delivery without needing a bank intermediary.
Frequently Asked Questions
What is an LC in simple terms?
An LC is a bank's promise to pay the seller on the buyer's behalf, as long as the seller delivers the correct goods and submits the right documents. The bank, not the buyer, guarantees payment.
What is the difference between LC and escrow?
Both protect both parties. An LC is bank-issued and mainly used for international trade or large transactions. Escrow is platform-managed and faster for domestic SME transactions.
What is the cost of an LC?
Banks charge LC issuance fees of 0.25–1% per quarter on the LC value, plus amendment, negotiation, and discrepancy charges. Total cost for a 90-day LC is typically 1–2% of transaction value.
Is LC mandatory for imports?
Not mandatory, but most international sellers require an LC or advance payment from new buyers. Established importers may negotiate open account or documents against acceptance (DA) terms.
Related Terms
What is Escrow Payment (Protected Payment)?
An escrow holds the buyer's payment with a neutral third party until the supplier delivers as agreed — eliminating advance payment fraud in B2B trade. VyaparSethu calls this "Protected Payment".
What is a Pro Forma Invoice?
A preliminary invoice sent before goods are dispatched. It confirms price, quantity, and terms — used to get buyer approval and arrange advance payment or LC.
What is Trade Credit?
An arrangement where a supplier allows the buyer to pay 30–90 days after receiving goods — the most common form of short-term business financing in India.
Put this knowledge to work
Post a Requirement — verified suppliers quote with proper GST invoices, HSN codes, and Protected Payment on every deal.