What Is A Letter Of Credit?
How L/Cs Protect Trade Payments

A letter of credit is a bank's guarantee that a seller gets paid once they meet agreed conditions, the standard trade-finance instrument behind most international shipments.

The Basics

What An L/C Actually Guarantees

An L/C shifts payment risk from the buyer directly to the buyer's bank, which is why sellers often insist on one for new trading relationships.

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A Bank Guarantees Payment

The buyer's bank commits to pay the seller once the seller presents documents proving the goods were shipped as agreed. The buyer's own creditworthiness becomes the bank's problem, not the seller's risk.

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Documents Must Match Exactly

Payment under an L/C depends on presenting documents (invoice, bill of lading, certificate of origin) that match the L/C's terms precisely. Even small discrepancies can delay payment.

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Reduces Risk For New Relationships

L/Cs are especially common when a buyer and seller haven't traded together before, since neither side has to simply trust the other's promise to pay or ship.

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Governed By UCP 600

Most letters of credit follow standardized international rules (UCP 600, published by the International Chamber of Commerce) so banks and traders worldwide interpret terms consistently.

Good To Know

L/Cs In Pakistani Import Practice

What's specific to how L/Cs get used for Pakistani trade.

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Often Cites CIF Terms

Letters of credit for Pakistani imports frequently specify CIF Incoterms, since the L/C amount then matches the seller's all-in quoted price including freight and insurance.

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Tight Document Deadlines

L/Cs specify exact deadlines for presenting shipping documents after loading. Missing this window can mean the bank refuses payment even if the goods shipped correctly.

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Banks Advise On Terms

Pakistani commercial banks handling L/C issuance can advise importers on standard clauses and common pitfalls before the L/C is opened, worth consulting before finalizing terms with an overseas supplier.

Related Reading

Related Trade Topics

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FOB vs CIF
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All 11 Incoterms
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Goods Declaration
assignment
Import License & NOCs
FAQ

Letter Of Credit Questions, Answered

What first-time importers ask before opening an L/C.

Why would a seller insist on a letter of credit instead of just an invoice? expand_more
An invoice alone relies on the buyer's promise to pay. An L/C replaces that promise with a bank's formal payment guarantee, which is far more reassuring to a seller shipping goods to a buyer they haven't worked with before.
What happens if my shipping documents don't exactly match the L/C? expand_more
Banks are strict about document conformity under an L/C. A mismatch (wrong dates, quantities, or missing certificates) can result in the bank refusing to release payment until the discrepancy is resolved or waived by the buyer.
Do all Pakistani imports require a letter of credit? expand_more
No. Many imports are settled through other payment methods (advance payment, documentary collection, open account) depending on the trust level between buyer and seller. L/Cs are common but not mandatory for every transaction.

Importing under a letter of credit?

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