Letters of Credit Guide
The complete guide to using documentary Letters of Credit for African exports. Learn how LCs protect both buyers and sellers in international trade.
Quick Stats
What is a Letter of Credit?
A Letter of Credit (LC) is a financial document issued by a bank that guarantees payment to the seller, provided they meet specific documentary requirements. It's the gold standard for international trade payment security.
Benefits for Sellers
- Bank guarantee of payment
- Reduced buyer credit risk
- Access to trade financing
- Clear payment terms
Benefits for Buyers
- Payment only on document compliance
- Verified shipment proof
- Extended payment terms possible
- Trade credibility building
Types of Letters of Credit
Irrevocable LC
HighCannot be amended or cancelled without agreement of all parties. Most common type for African exports.
Best for: 85% of African trade LCs
Confirmed LC
Very HighAdds a second bank's guarantee, providing extra security when dealing with unfamiliar banks.
Best for: High-value commodities
Revolving LC
HighAutomatically reinstates after each use. Ideal for regular shipments to the same buyer.
Best for: Repeat orders
Transferable LC
Medium-HighCan be transferred to another beneficiary. Useful for trading companies and intermediaries.
Best for: Commodity traders
Standby LC
BackupActs as a backup guarantee. Only drawn upon if the buyer fails to pay through normal channels.
Best for: Credit enhancement
Back-to-Back LC
MediumTwo separate LCs where the first serves as collateral for the second. Common for intermediary trades.
Best for: Trading companies
LC Process Flow (Step-by-Step)
Sales Contract
1-3 daysBuyer and seller agree on terms including LC requirement
Actor: Both Parties
LC Application
3-5 daysBuyer applies to their bank (issuing bank) for LC opening
Actor: Buyer + Issuing Bank
LC Issuance
1-2 daysIssuing bank sends LC to advising bank in seller's country
Actor: Issuing Bank
LC Advising
1-2 daysAdvising bank verifies authenticity and notifies the seller
Actor: Advising Bank
Shipment
VariableSeller ships goods and collects required documents
Actor: Seller
Document Presentation
1-5 daysSeller presents documents to negotiating bank
Actor: Seller + Negotiating Bank
Document Examination
5 banking daysBanks examine documents for LC compliance
Actor: Both Banks
Payment
1-3 daysIf compliant, payment is released to the seller
Actor: Banks
Common LC Discrepancies & How to Avoid Them
Up to 70% of LC document presentations contain discrepancies. Here are the most common ones:
| Discrepancy | Prevention | Severity |
|---|---|---|
| Late Shipment | Request LC amendment if delays occur | Critical |
| Description Mismatch | Copy exact LC wording on all documents | Critical |
| Short Shipment | Verify tolerance clauses (+/- 5% typically allowed) | High |
| Missing Documents | Create checklist from LC requirements | Critical |
| Insurance Issues | Ensure 110% CIF value, correct currency | High |
| Stale Documents | Present within 21 days of B/L date | High |
LC Cost Breakdown
| Fee Type | Typical Range | Calculation Basis |
|---|---|---|
| Issuance Fee | 0.125% - 0.5% | LC value, per quarter/annum |
| Advising Fee | $50 - $150 | Flat fee per LC |
| Confirmation Fee | 0.5% - 2% | LC value, risk-dependent |
| Amendment Fee | $50 - $100 | Per amendment |
| Negotiation Fee | 0.125% - 0.25% | Drawing amount |
| Courier/SWIFT | $30 - $100 | Per transmission |
| Discrepancy Fee | $50 - $100 | Per discrepancy |
Example: For a $50,000 LC with confirmation, expect total fees of $1,500-$2,500 (3-5% of value), covering issuance, confirmation, negotiation, and courier charges.
African Banks with LC Services
Frequently Asked Questions
Pro Tips
Always request a draft LC for review before final issuance
Build LC costs into your pricing from the start
Use UCP 600 terms - they're internationally standardized
Never ship until you have an acceptable LC in hand