Letter of Credit

A letter of credit (LC) is a piece of document that is presented on behalf of the importer by the importer's bank. The applicant of the LC is the importer, while the beneficiary is the exporter. By LC issuance, the exporter is assured that the issuing bank will pay the exporter for the foreign tradeconducted. Also, the issuing bank guarantees to pay the stated amount as per the agreed timeline and against specified documents. If the documents submitted are in accordance with the LC's terms and conditions, there is no reason for the bank to deny payment.

Under an LC arrangement, the issuing bank may act on the applicant's (importer's) request and instructions or its own behalf. A payment to (or to the order of) the beneficiary is made by the issuing bank (that is, the exporter). Another option is that the issuing bank can accept the bills of exchange or draft that are drawn by the exporter. The issuing bank can also permit advising or nominated banks to pay or accept bills of exchange.

Apart from the three parties, the advising bank, negotiating bank, the reimbursing bank, confirming bank, and the second beneficiary are also involved in the LC agreement.


On behalf of the exporter, the advising bank is responsible for the transfer of documents to the issuing bank and is generally located in the exporter's country.


The confirming bank offers an additional guarantee to the undertaking of the issuing bank. This happens when the exporter is not pleased with the assurance of the issuing bank.


The negotiating bank negotiates the documents submitted by the exporter concerning the LC. Subject to the completeness of the records, it makes payments to the exporter and demands a refund under the credit.


The reimbursing bank is where the issuing bank creates the paying account. The reimbursing bank honors the claim that settles the negotiation/acceptance/payment coming in through the negotiating bank.


The second beneficiary is one who can represent the original beneficiary in their absence. In such an eventuality, the exporter's credit shall be passed to the second beneficiary, according to the conditions of the transfer.

Process of Letter of Credit

There are four primary steps involving the LC process:

Step 1: The issuing of LC

After the parties have accepted the contract and the use of LC to the trade, the importer will apply to the issuing bank to issue an LC in favor of the exporter. The LC is sent to the advising bank by the issuing bank.

The latter is usually located in the country of the exporter and may even be the bank of the exporter. The advising bank (confirming bank) verifies the LC's authenticity and forwards it to the exporter.

Step 2: Shipping of goods

The exporter is obliged to verify the LC's receipt to their satisfaction and begin the shipping process for goods.

Step 3 - Providing Documents to the confirming bank

The exporter (either on their own or via the freight forwarder) presents the documents to the advising/confirming bank after the goods are shipped.

Step 4 - Settlement of an importer's payment and possession of goods

In turn, the bank sends them to the issuing bank, and the amount is paid, negotiated, or accepted, as the case may be. The issuing bank verifies the documentation and obtains the importer's payment. It sends the documents to the importer, who uses them to gain possession of the goods being delivered.

When it comes to LC, there are different fees and reimbursements involved. This includes:


Opening charges that involve the charged upfront, commitment fees, and the utilization fee charged for the LC's agreed tenure.


At the end of the LC period, retirement charges are to be paid. This includes the advisory fee charged by the advisory bank, the reimbursements payable by the applicant to the bank in respect of the obligations relating to international law, the confirming bank fee, and the bank fees payable to the issuing bank.

Advantage of Letter of Credit (LC) Services from Finnova Advisory

Finnova Advisory offers Letter of Credit (LC) assistance. We have formed alliances with numerous banks and financial institutions to provide a wide range of lender options. According to your eligibility and financial requirement, we recommend quick processing, competitive interest rates, and multiple collateral options to ensure that this is the best option for your business. We also deal with private, PSUs, co-operative banks, and NBFC’s.

Along with this, our team of specialists takes pride in offering unbiased advice to our customers regarding our services. Acting as a mediator, we are readily available to help you apply for corporate finances service from some leading banks and financial institutions.