This practical guide to letters of credit for exporters covers everything UK businesses need to know — from how LCs work and when to use them, to protecting your margins and avoiding costly mistakes.
A Letter of Credit can make or break a deal in international trade. It’s one of the most trusted ways to secure payment when exporting—but it’s also one of the most misunderstood. Whether you’re an experienced exporter or just starting to trade globally, understanding how Letters of Credit work (and how to avoid common mistakes) is essential for protecting your margins and getting paid.
We’re often asked questions like:
Let’s explore these questions through two real-world stories that show just how much is at stake.
That’s what a UK supplier said to a potential buyer who contacted us for help.
The buyer was trying to place a small sample order—just a few thousand pounds—but due to currency restrictions in their country, a Letter of Credit (LC) was the only way they could pay.
The UK supplier refused. They weren’t familiar with Letters of Credit and felt uncomfortable with the process. So they turned the buyer down.
Here’s what they didn’t realise…
That “small” order was only the start.
When we asked the buyer what was behind it, he explained:
“There was a much larger order in the pipeline—around half a million pounds—but we wanted to test the waters first.”
So the supplier didn’t just turn down a small opportunity—they walked away from £500,000 worth of business, purely because they weren’t willing to accept a Letter of Credit as a payment method.
A Letter of Credit is a written commitment from a bank to pay the exporter—as long as they meet the agreed conditions and present the correct documents.
It’s a way of ensuring that you still get paid, even if the buyer is overseas and the trade relationship is new or uncertain.
Yes—absolutely.
They’re still commonly used in global trade, especially in countries where:
We regularly see LCs used in regions such as South Asia (India, Pakistan, Bangladesh, Sri Lanka), Southeast Asia (Philippines, Vietnam, Thailand), parts of the Middle East, and across South America. Usage varies by country and sector, but they remain a core part of international trade in many areas.
| Payment Method | Risk to Exporter | Risk to Importer | Best Used When |
|---|---|---|---|
| Letter of Credit | Low — bank guarantees payment | Low — goods must be shipped before payment | New buyer, high value orders, restricted currency countries |
| Open Account | High — goods shipped before payment received | Low — pay after receiving goods | Established, trusted buyer relationships |
| Advance Payment | None — paid before shipping | High — pays before receiving goods | New exporters, high risk markets, small orders |
| Documentary Collection | Medium — no bank guarantee | Medium — documents released on payment | Established relationships where LC feels excessive |
Here’s a simplified version of the process:
In theory, it’s straightforward. But the practical side—getting the documents 100% correct, using the right terminology, building in tolerances—can be complex.
One delegate who came on our course recently had run into a costly problem.
She was dealing with a buyer in Morocco who insisted on a freight quote at the time of order—even though the goods wouldn’t ship for another 26 weeks.
Their freight forwarder wouldn’t provide a long-range quote, not even an estimate with markup. And the buyer wouldn’t proceed without one.
In a previous order, they’d taken a guess—and when freight costs increased, the company ended up thousands of pounds out of pocket.
What she didn’t know was that under UCP600 Article 30, exporters can build in a 10% tolerance on the total value of the Letter of Credit.
By adding that clause, she could have protected the company from fluctuating freight costs—and preserved the profitability of the order.
She left the training knowing exactly how to apply it next time.
Letters of Credit are designed to reduce the risk of non-payment, especially in high-value or higher-risk international transactions.
For exporters, they provide security: if you meet the terms, the bank will pay you.
For importers, they offer assurance: the exporter must ship the goods and meet conditions before payment is made.
They’re often used when:
Another aspect we cover in training is how Incoterms interact with payment terms like LCs.
Certain Incoterms can expose the exporter to extra risk—especially when it comes to documentary evidence and transport arrangements. Choosing the right term can make the Letter of Credit process much smoother—and much safer.
Letters of Credit are still very much part of the global trade landscape—and they can open the door to valuable opportunities.
But if you’re unsure about how to manage them, or you’ve had a bad experience in the past, the answer isn’t to avoid them. The answer is to get equipped with the right knowledge, tools, or support.
Our course, Receiving Payment & Using Letters of Credit, is delivered live online.
You’ll learn:
Find out more and book here: https://www.exporter-services.co.uk/export-import-courses/receiving-payment-and-using-letters-of-credit/
We offer a Letter of Credit Management Service, where we take care of the whole process for you—from reviewing the LC terms to preparing the documents and ensuring everything is compliant.
Contact our friendly experts at team@exporter-services.co.uk or call us on 0115 727 0018
Our Helpdesk service gives you access to expert advice when you need it. Whether you’re unsure about a clause, a document, or a deadline—we’re here to help by phone or email.
Email: team@exporter-services.co.uk
Tel: 0115 727 0018
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A Letter of Credit (LC) is a written commitment from a bank to pay the exporter, provided they meet the agreed conditions and present the correct documents. It is one of the most secure payment methods in international trade.
Letters of Credit are most useful when trading with a new buyer, in countries with currency restrictions, or where large sums are involved and trust is still being established. They are commonly required in South Asia, Southeast Asia, the Middle East and South America.
The exact documents depend on the LC terms, but typically include a commercial invoice, bill of lading or airway bill, packing list, certificate of origin, and sometimes an inspection certificate. Getting these documents exactly right is critical — even minor discrepancies can delay payment.
If your documents contain discrepancies, the bank can refuse to pay until they are corrected or the buyer waives the discrepancy. This can cause significant delays and in some cases result in non-payment. This is why understanding the LC terms before shipping is essential.
Yes — we offer a full Letter of Credit Management Service where we review the LC terms, prepare the documents and ensure everything is compliant before submission. We also run training courses covering how LCs work, common pitfalls and how to protect your margins. Get in touch to find out more.
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