Letter of credit (LC)
What is a letter of credit, and when does an exporter need one?
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BY MICHAEL SHANG · SIXTEEN YEARS IN COMMERCIAL BANKING · UPDATED
// THE SHORT ANSWER
A letter of credit is a bank's undertaking to pay an exporter on presentation of the documents the credit specifies — invoice, transport documents, certificates — whether or not the buyer is still willing to pay. It exists because the two sides of a cross-border sale do not yet trust each other enough to trade on open account, and it moves the credit risk from the buyer to the bank that issued the credit. Its protection is exact rather than generous: documents that do not match the credit's terms can be refused, so an exporter can ship perfectly and still not be paid.
BASIS Practitioner judgment from sixteen years in commercial banking, set out in How Bankers Think (Highbank Press, 2026). Every borrower on this site is a composite constructed for teaching, not a client. The market is mid-market commercial lending as practised in New Zealand and Australia; where a convention differs elsewhere, the page says so.
// WORKED IN
// NEXT TO IT
- Borrowing base
- Dilution (receivables)
- Advance rate
- Eligible receivables
- Concentration limit
- Recourse (receivables finance)
- Invoice discounting
- Trade credit insurance
- Performance bond
- Standby letter of credit (SBLC)
- Documentary collection
- Sub-limit
- Open account
- Discrepancy (letter of credit)
- Documents against acceptance (D/A)
- Early settlement discount
- Aged debtors report
- Collection account
- Availability (borrowing base)
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