What is Letter of Credit?
A letter of credit (LC), or documentary credit, is an irrevocable undertaking by an issuing bank, made at the buyer's (applicant's) request, to pay the seller (beneficiary) against presentation of documents that comply with the terms of the credit. Most commercial LCs are issued subject to the ICC's Uniform Customs and Practice for Documentary Credits, UCP 600, a 39-article set of rules that applies when the credit expressly incorporates it. Under UCP 600 the credit is separate from the sale contract (article 4), and banks deal with documents, not with goods, services or performance (article 5). A confirming bank can add its own undertaking, and credits may be available by sight payment, deferred payment, acceptance or negotiation. The ICC's International Standard Banking Practice, currently ISBP 821 (2023), explains how UCP 600 is applied in document examination but does not amend it.
Why it matters for forwarders
For forwarders, the LC defines the transport document they must produce, often a full set of clean on-board bills of lading, sometimes a multimodal document or air waybill, with exact consignee, notify party, port and shipment date requirements. Under UCP 600 article 14(c), original transport documents must be presented no later than 21 calendar days after shipment and within the expiry of the credit, so late release of bills can make a correct shipment unpayable. Banks have a maximum of five banking days following presentation to decide whether documents comply (article 14(b)). Wrong port names, a missing on-board notation, late shipment and inconsistent descriptions are typical grounds for refusal, so ask the shipper for the LC wording before issuing the bill. Never pre-date or issue a bill of lading before loading to meet an LC deadline, as this exposes the issuer to liability and may amount to fraud.