What Is an LC (Letter of Credit)?

The Letter of Credit (LC) is a universal payment instrument issued by the buyer's bank to the seller, guaranteeing payment once specified conditions are met. It is the most widely used method worldwide for bridging the trust gap between importer and exporter.

Put simply, an LC is the bank's undertaking to pay the seller in the buyer's place. Governed by international banking rules (UCP 600), the system operates on a documentary basis: the bank examines whether the documents presented comply with the terms of the credit, rather than the physical condition of the goods.

01LC Operational Process and Transfer Procedure

The Letter of Credit process comprises six main steps, each recorded digitally to leave no room for error:

1. Commercial Contract and ApplicationThe buyer (importer) and seller (exporter) agree on the goods, price and shipping terms. The buyer then applies to its own bank (the Issuing Bank) to open a letter of credit in the seller's favour.
2. Issuance of the Letter of CreditSWIFT MT700: The buyer's bank draws up the credit and transmits it in MT700 format, via the secure global banking network SWIFT, to the seller's bank (the Advising Bank). The MT700 message is the official "issuance" message containing all the credit's details.
3. Advice and ConfirmationThe seller's bank advises the incoming MT700 message to the seller. If the seller requires additional security, a "Confirmed Letter of Credit" comes into play at this stage, with the seller's bank also providing a payment guarantee.
4. Shipment and Document PreparationThe seller ships the goods within the timeframe specified in the credit, then prepares the critical documents that follow — the Bill of Lading, commercial invoice, packing list and certificate of origin.
5. Document Presentation and ExaminationThe seller presents the prepared documents to its own bank. The banks examine the documents against UCP 600 rules; where the documents fully comply with the credit's terms (no discrepancies), they are forwarded to the buyer's bank.
6. Payment and DeliveryOnce the buyer's bank approves the documents, it pays the seller (or incurs a deferred payment obligation, if applicable). The buyer, in turn, collects the documents from its bank to clear the goods through customs.

02Types of LC and Their Uses

Different letter of credit structures may be chosen depending on the nature of the transaction:

Sight LC

A model in which payment is made as soon as the documents are presented to the bank.

Usance LC

A deferred-payment model in which payment is made a fixed period after shipment (for example, 30, 60 or 90 days).

Transferable LC

A flexible structure used by intermediary firms to make payment to the principal supplier.

Confirmed LC

The most secure method, in which a bank in the exporter's own country provides a payment guarantee in addition to the importer's bank.

03Why Work with MCF Danışmanlık?

Letter of credit transactions are sensitive enough that a single misplaced letter or date can trigger a "discrepancy" (payment block). At MCF Danışmanlık Ltd., we provide professional advisory services on:

the drafting and review of letter of credit texts (MT700);

document control to guard against discrepancy risk;

management of the global banking network through our London-based partner, Derwent Global Capital.