Letters of credit explained

A letter of credit is the most structured way to pay an overseas supplier. In essence, it substitutes a creditworthy bank's credit for your own: the bank undertakes to pay your supplier when the supplier presents documents that comply with the credit's terms. That reassurance is why a letter of credit can unlock orders that neither side would otherwise be comfortable with.

It is also the most demanding method to operate. Payment turns entirely on documents, the paperwork must be exact, and bank charges apply on both sides. This guide explains the mechanics, the rules that govern them, and how to judge when a letter of credit is worth its cost.

How a letter of credit works

A letter of credit is a written undertaking from a bank to pay your supplier a set amount, provided the supplier presents documents that match the credit's terms within its deadlines. Two principles make it powerful.

• Payment is against documents, not goods. The bank pays when compliant documents are presented, for example the commercial invoice, packing list, bill of lading and any certificates the credit requires. The bank does not inspect the goods themselves.
• It is independent of the sales contract. The credit stands on its own. Even if you have a dispute with your supplier over the underlying contract, the bank's obligation is to honour the credit against compliant documents.

For you as the buyer, this means the documents define what you are protected against. If you need an inspection certificate or a specific shipment date, it has to be written into the credit, because the bank only checks what the credit asks for.

The rules and the timelines

Letters of credit are governed by UCP 600, the International Chamber of Commerce rule set in force since 1 July 2007. UCP 600 sets out how banks examine documents and how the obligations work, and most commercial credits are issued subject to it.

• Banks examine documents on their face for compliance with the credit, not for the truth of what they assert.
• A bank commonly has up to five banking days after presentation to examine the documents and decide whether they comply.
• Documents are usually subject to a presentation window, often around 21 days after shipment, within which they must be presented, and never later than the credit's expiry.

These conventions shape the rhythm of a letter-of-credit transaction, so both you and your supplier need to plan document preparation and presentation around them rather than treating payment as immediate.

Cost, effort and discrepancy risk

A letter of credit earns its keep on the orders where the alternative would expose someone to serious risk. It is typically worth the cost and administration when an order is large, when the supplier is unproven, or when country risk is higher and you want a bank's undertaking standing behind the deal.

Against that, weigh two things.

• Cost and effort. Letters of credit carry bank charges and meaningful paperwork on both sides. For small or routine orders the overhead often outweighs the benefit.
• Discrepancy risk. Because payment is strictly against compliant documents, a single error, a mismatched description, a missing signature, a late presentation, can make the documents discrepant and hold up payment until it is resolved or waived. Discrepancies are common, so accurate, consistent paperwork is not optional; it is the whole game.

For your supplier, the protection of a letter of credit is only as good as their ability to present clean documents on time.

How Altery fits

It is important to be clear: Altery does not issue letters of credit. A letter of credit is a bank instrument, issued and handled by banks under UCP 600, and that sits outside what Altery does. Altery is complementary to it, not a substitute.

Where Altery helps is the everyday multi-currency payment leg that runs alongside the credit. You can hold a multi-currency business account in USD, EUR and GBP, manage the FX on your own timeline rather than at the moment a bank charge or settlement falls due, and make traceable transfers, for example to cover fees, related costs or payments to parties outside the credit, via SWIFT, SEPA and local payment rails. Real-time balances and categorised spend keep the full picture visible, ring-fencing lets you set aside the funds tied to a particular trade, and multi-entity management keeps things separate if you trade through more than one company.

In short, the bank carries the letter of credit; Altery can carry the surrounding multi-currency payments and FX. Altery is not a bank, and this guide is general information, not advice.

Frequently asked questions