For many steel exporters, especially with new buyers or large orders, the letter of credit (LC) is the safest way to get paid. It replaces the buyer's promise with a bank's promise. But an LC protects you only if you meet every condition exactly. A wrong date, a spelling difference or a missing document can turn a "guaranteed" payment into a long negotiation.
This guide is general information, not legal or financial advice. Work with your bank's trade finance team on each LC.
How a letter of credit works
- Sales contract — you and the buyer agree on price, Incoterm, delivery and payment by LC.
- LC issued — the buyer's bank (issuing bank) opens the LC in your favour.
- Advising — your bank (advising bank) checks the LC is genuine and sends it to you.
- You ship the goods and prepare documents exactly as the LC requires.
- Presentation — you submit documents to your bank within the allowed time.
- Examination — banks check documents against the LC terms.
- Payment — if documents comply, the issuing bank pays (or accepts to pay later).
- Release — the buyer receives the documents and collects the goods.
Most LCs are governed by the ICC rules UCP 600.
Types of LC you will see
Sight LC
Payment is made when compliant documents are presented. Best for cash flow.
Usance (deferred) LC
Payment is due after a set period, such as 90 days from bill of lading date. You can often discount it with your bank to get funds earlier, at a cost.
Confirmed LC
A second bank — often in your country — adds its own payment promise. Useful when the issuing bank or its country carries higher risk. Confirmation has a fee.
Transferable and back-to-back LCs
Used by traders who buy from a mill and sell to an overseas buyer. These need careful handling of documents and margins.
Check the LC as soon as you receive it
Read every clause before you produce or ship. Look for:
- Beneficiary name and address — exactly as in your company records.
- Amount and tolerance — "about" or ±10% matters for steel quantities.
- Description of goods — must match your proforma and later your invoice.
- Incoterm and ports — e.g. "CFR Jebel Ali". See our Incoterms guide.
- Latest shipment date — can you really ship by then?
- Expiry date and place — expiry at your bank's counter is safer than abroad.
- Presentation period — UCP 600 allows up to 21 days after shipment unless the LC states otherwise, and always within the expiry.
- Partial shipments and transhipment — allowed or prohibited?
- Required documents — invoice, packing list, B/L, COO, MTC, inspection certificate, insurance.
- Special conditions — certificates signed by named parties, legalisation, specific wording.
If anything is unclear or impossible, ask the buyer for an amendment before shipping.
Watch for risky clauses
- Documents to be signed or approved by the buyer ("soft clauses").
- Inspection certificates issued only by the buyer's representative without a clear process.
- Very short presentation periods.
- Wording that must appear on documents you do not control.
These can give the buyer a way to avoid payment.
Avoid discrepancies
Most LC problems come from small document errors:
- Goods description differs from the LC.
- Quantities or weights don't match across documents.
- Late shipment or late presentation.
- B/L not marked "clean on board" or consignee wrong.
- Missing original documents or wrong number of copies.
- Spelling differences in names or addresses.
Use a document checklist for every shipment — see our export documents checklist.
LC vs other payment terms
| Term | Risk for exporter | Typical use |
|---|---|---|
| Advance payment | Lowest | Small or new orders |
| Letter of credit | Low (if compliant) | New buyers, large orders |
| Documents against payment (D/P) | Medium | Known buyers |
| Open account | Highest | Trusted long-term buyers |
Many steel exporters use a mix: a partial advance plus LC or D/P for the balance.
Frequently asked questions
Is a letter of credit a guarantee of payment?
Only if your documents comply exactly with the LC terms. Discrepancies allow the bank to refuse or delay payment.
Who pays LC charges?
It is negotiated. Usually the buyer pays issuing charges and the seller pays charges in their own country, but confirmation fees are often borne by the seller.
What is UCP 600?
The ICC's Uniform Customs and Practice for Documentary Credits — the rules most LCs follow.
Can an LC be changed?
Yes, through an amendment issued by the issuing bank and accepted by you.
Key takeaways
- An LC replaces the buyer's credit risk with a bank's — if documents comply.
- Check every clause on receipt and request amendments early.
- Discipline in documents is what makes LCs safe.
Clear export quotations that state payment terms up front make LC negotiations much smoother.
