Letter of Credit Basics – Page 8 – Letter of Credit Consultancy Services

Confirmation and Confirmed Letter of Credit

Ozgur Eker (CDCS) Confirmation, Confirmed Letter of Credit, Letter of Credit Basics, Letter of Credit Types 22 January 201815 February 2025Confirmation, Confirmation Fee, Confirmed Letter of Credit, Confirming Bank

Updated on:

15 February 2025

When an irrevocable letter of credit is issued, the risk of payment rests with the issuing bank. This type of letter of credit is defined as an unconfirmed letter of credit.

However, in certain circumstances, the exporter may find the issuing bank not fully trustworthy and/or the country where it is located has high political or economic uncertainty.

In this situation, the exporter should consider requesting a confirmed letter of credit.

Confirmation is a security tool for the exporters. Confirmation eliminates country risks and insolvency risks of the issuing bank.

With a confirmed letter of credit, another bank, the confirming bank, usually located in the same country that the exporter is located, will add its confirmation to the letter of credit.

By adding its confirmation, the confirming bank undertakes to honour the exporter’s claim under the letter of credit, provided all terms and conditions of the letter of credit are met. (1)

Availability of Letters of Credit

Ozgur Eker (CDCS) Acceptance, At Sight, Deferred Payment, Letter of Credit Basics, Negotiation, Payment Types of Letter of Credit 22 January 201815 February 2025Acceptance, At Sight, Available By, Available With, Deferred Payment, Negotiation

payment types in a letter of credit transaction

Updated on:

15 February 2025

Letters of Credit are flexible instruments because they incorporate various payment options.

According to letter of credit rules, a credit must state whether it is available by sight payment, deferred payment, acceptance or negotiation. (UCP 600 – Article 6- b)

The credit must explicitly indicate its availability as: (i) immediate payment (sight), (ii) payment at a future determinable date (deferred), (iii) acceptance of a time draft drawn on the issuing, nominated bank, or confirming bank, or (iv) negotiation with or without recourse to the beneficiary.

Sight payment ensuring prompt payment upon document compliance. Deferred payment, allowing for payment at a future date. Acceptance LCs involve the bank’s commitment to pay at a later date via draft acceptance. Negotiation LCs offer the possibility of receiving early payment by discounting drafts.

Letter of Credit Transaction

Ozgur Eker (CDCS) How to Work With a Letter of Credit, Letter of Credit Basics 20 January 201815 February 2025Letter of Credit Process, Letter of Credit Transaction

Updated on:

15 February 2025

A Letter of Credit (L/C) is a payment method in international trade that ensures secure payment and delivery of goods between exporters and importers.

It relies on collaboration between banks, logistics providers, the exporter, and the importer to reduce risks and enable smooth cross-border transactions.

On my previous posts, I have not only made a definition of a letter of credit but also clarified its types and parties that involved in it.

You can also check the risks associated with letters of credit and sample letters of credit from my past posts.

On this post, I will try to explain letter of credit process in a very simple way.

After reading this article, you should understand the working mechanism of letter of credit payment in general terms.

Please click to download our article “Letter of Credit Transaction” as a PDF.

Risks in Letters of Credit

Ozgur Eker (CDCS) Letter of Credit Basics 17 January 201814 February 2025Letter of Credit Risks

Although letter of credit is a balanced payment method in terms of risk issues for both exporters and importers, each letter of credit party bears some amount of risk; higher or lower.

For the seller, the primary concern lies in the financial stability and trustworthiness of the issuing bank, often located in a distant country and potentially unfamiliar to them.

Conversely, the buyer faces the risk of paying for goods that may be unsatisfactory, substandard, or even non-existent, as well as uncertainties surrounding the documents presented.

As I have explained on my previous post, letters of credit transactions are handled by banks, which make banks one of the parties that bears risks in l/c transactions in addition to exporters and importers.

Risks in letters of credit can be discussed under four groups: general risks, risks to the applicant, risks to the beneficiary and risks to the banks.

On this post each risk group will be examined in detail with real life examples.

Parties to Letters of Credit

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This page discusses the parties involved in a letter of credit. Each L/C party will be presented briefly, and its roles and responsibilities will be explained with the help of the graphic illustrations. A video on this topic is also available.

A Letter of Credit (LC) is a financial instrument in international trade that guarantees payment to the seller (beneficiary) as long as the agreed-upon terms and conditions are met.

It involves multiple parties, each playing a distinct role.

The key parties in an LC transaction include the beneficiary (seller), applicant (buyer), issuing bank, advising bank, confirming bank, nominated bank, and reimbursing bank. Understanding the roles and responsibilities of these entities ensures smooth and hassle-free letter of credit operations for businesses.

youtube video link image for Parties to Letters of Credit

Types of Letters of Credit

Ozgur Eker (CDCS) Back-to-Back Letter of Credit, Clean Letter of Credit, Commercial Letter of Credit, Confirmed Letter of Credit, Irrevocable Letter of Credit, Letter of Credit Basics, Letter of Credit Types, Red Clause Letter of Credit, Revocable Letter of Credit, Standby Letter of Credit, Transferable Letter of Credit, Unconfirmed Letter of Credit 15 January 201812 February 2025Letter of Credit Types

From their origins in 18th-century traveler’s credit systems to today’s cornerstone role in international commerce, letters of credit (LCs) have transformed into all-round, secure financial instruments critical for mitigating risk in cross-border transactions.

These tools are broadly categorized into commercial letters of credit—the go-to payment method for facilitating trade deals—and standby letters of credit, which act as safety nets for contractual obligations.

Beyond these core types, specialized variations like red clause, confirmed, transferable, and back-to-back letters of credit offer tailored solutions to meet the unique demands of buyers and sellers.

In this post, we break down the different types of letters of credit and how they secure global transactions.

What is a Letter of Credit

Ozgur Eker (CDCS) Letter of Credit Basics, What is Letter of Credit 15 January 201812 February 2025Letter of Credit Definition

Letter of credit, in a broad perspective, is one of the payment methods in international trade.

The letter of credit is distinguished itself from other payment methods in international trade by its complex structure and detailed rules.

A documentary credit, also known as a letter of credit, is a written guarantee issued by a bank (issuing bank) on behalf of a buyer (applicant) to pay the seller (beneficiary) a specified amount, either at sight or on a future date.

This payment commitment is subject to the beneficiary’s compliance with the terms and conditions outlined in the credit and is fulfilled through a ‘complying presentation’.

According to the Uniform Customs and Practice for Documentary Credits (UCP 600), a complying presentation must meet three key requirements:

Documents must strictly adhere to the terms and conditions of the documentary credit.
If the credit is governed by UCP 600, documents must align with its applicable articles and sub-articles.
Documents are reviewed based on latest version of international standard banking practices, ISBP 821 (International Standard Banking Practice for the Examination of Documents under UCP 600).

Understanding these principles ensures smooth international trade transactions and minimizes payment risks.

How to Work with a Letter of Credit Sample?

Ozgur Eker (CDCS) How to Work With a Letter of Credit, L/C Samples, Letter of Credit Basics 12 January 20189 February 2025Sample Letter of Credit

Each letter of credit is unique, varying by industry, document requirements, and even modified UCP 600 terms.

While our samples don’t provide a one-size-fits-all solution, they offer a broad understanding of how letters of credit function in real-world scenarios.

Drawn from over 16 years of consultancy experience, these examples have been modified for privacy.

By studying them, you can learn how to read letter of credit texts in SWIFT format, identify key transaction elements, and understand common document requirements and bank expectations, helping you navigate real-life letter of credit scenarios with greater confidence.