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:
- What is a Letter of Credit?
- Do people still use them?
- When should they be used?
- How do they work, and why are they needed?
Let’s explore these questions through two real-world stories that show just how much is at stake.
“We don’t do Letters of Credit.”
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.
So, what is a Letter of Credit?
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.
Are people still using Letters of Credit?
Yes—absolutely.
They’re still commonly used in global trade, especially in countries where:
- Currency is tightly regulated
- Local banks or governments specify LCs as a requirement for trade
- Trust between trading partners hasn’t yet been established
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.
How do they work?
Here’s a simplified version of the process:
- The buyer arranges for their bank to issue a Letter of Credit
- The LC is sent to the exporter, outlining exactly what documents are needed
- The exporter ships the goods and presents those documents
- If the documents are compliant, payment is made by the bank
In theory, it’s straightforward. But the practical side—getting the documents 100% correct, using the right terminology, building in tolerances—can be complex.
A lesson in tolerances: protecting your margin
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.
Why are Letters of Credit used?
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:
- You’re trading with a new buyer
- A country has strict currency or financial controls
- Large sums are involved
- Trust is still being built
Choosing the right Incoterm matters, too
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.
The bottom line
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.
How Exporter Services Can Help
✅ Learn with confidence: Join our training
Our course, Receiving Payment & Using Letters of Credit, is delivered live online.
You’ll learn:
- The pros and cons of each international payment method
- How LCs work and how to comply with them
- What terms to include to protect your profit
- How to choose the right Incoterms to reduce risk
Find out more and book here: https://www.exporter-services.co.uk/export-import-courses/receiving-payment-and-using-letters-of-credit/
✅ Want someone else to handle it?
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
✅ Just need occasional support?
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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