Advantages of Letter of Credit to Exporters

A letter of credit (LC) is a document issued by a bank to an importer that guarantees payment to an exporter for goods or services provided. LCs are a common payment mechanism in international trade because they provide several benefits to exporters.


Here are some of the main benefits of LCs for exporters:

  • Guaranteed payment: The bank that issued the LC guarantees payment to the exporter as long as the exporter follows the LC's terms and conditions. This eliminates the possibility of the importer failing to pay, which can be a major problem for exporters, particularly when working with new or unfamiliar customers.
  • Reduced risk of fraud: Because they involve a third party (the bank), LCs are a more secure payment mechanism than open account transactions. This decreases the risk of fraud because the bank will only release payment to the exporter after verifying that the products or services have been sent and that all necessary documentation has been provided.

  • Improved cash flow: Because they obtain payment from the bank upon presentation of the relevant documentation, LCs can assist exporters in improving their cash flow. For exporters, this can be a crucial source of working capital, especially when dealing with large orders or extended lead periods.
  • Access to new markets: LCs can assist exporters in expanding into new markets by providing importers with assurance that the items they ordered will be delivered. This is especially crucial for exporters who are new to a market or dealing with customers they are unfamiliar with.

Overall, LCs can be a valuable tool for exporters who want to reduce their risk, improve their cash flow, and expand into new markets. However, it is important to note that LCs do have some disadvantages, such as the cost of issuing an LC and the time it can take to process an LC transaction. It is also important to choose the right type of LC for the specific transaction, as there are different types of LCs with different levels of security and flexibility.



Here are some of the most common types of LCs:

  • Irrevocable LC: This is the most safe sort of LC because neither the importer nor the bank can change or cancel it. Exporters often prefer irrevocable LCs because they provide the greatest level of security against nonpayment.
  • Confirmed Letter of Credit (LC): This is an irrevocable LC that is also guaranteed by the exporter's bank. Because they are backed by two banks, confirmed LCs provide the maximum level of protection for exporters.
  • Revocable LC: This form of LC can be modified or cancelled at any time by the importer or the bank. Revocable LCs are less safe than irreversible LCs and are primarily used for low-risk transactions.
  • Unconfirmed Letter of Credit (LC): This sort of LC is not guaranteed by the exporter's bank. Unconfirmed LCs are the least secure sort of LC and are normally only used for low-risk transactions.


The optimum form of LC for a certain transaction will be determined by a variety of variables, including the transaction's amount, the risk involved, and the relationship between the exporter and the importer. To select the best sort of LC for your needs, talk with a banker or trade finance professional.