A letter of credit is a payment instrument in which the buyer’s bank undertakes to pay the seller upon presentation of complying documents, reducing counterparty risk for both parties in international food and agricultural transactions.
In trade practice
Governed by the ICC’s UCP 600 rules, a letter of credit requires the seller to present specified documents, typically a commercial invoice, bill of lading and relevant certificates, within a set timeframe. Banks check documents strictly against the credit terms; discrepancies such as a mismatch in product description or late shipment date are common causes of non-payment. Buyers and sellers should align the required document list with what can realistically be obtained before the credit expires.
In a specification
A sales contract specifying a letter of credit should name the issuing bank, the document set required, the latest shipment date and the expiry date of the credit.