How Letters of Credit Work in Agricultural Trade

What Is a Letter of Credit?

A Letter of Credit (LC) — also called a Documentary Credit — is a payment instrument issued by a buyer's bank that guarantees payment to the seller, provided the seller presents the correct documents within the specified timeframe.

In simple terms: the buyer's bank promises to pay you, the exporter, as long as you deliver the goods and present the documents exactly as specified in the LC. This makes the LC one of the most secure payment methods in international trade — the bank's creditworthiness replaces the buyer's.

How the LC Process Works

The LC process involves four parties: the buyer (applicant), the buyer's bank (issuing bank), the seller (beneficiary), and the seller's bank (advising or confirming bank). The process follows these steps:

• 1. The buyer and seller agree on LC payment terms in the sales contract.
• 2. The buyer instructs their bank to issue an LC in favour of the seller.
• 3. The issuing bank sends the LC to the seller's bank (advising bank), which notifies the seller.
• 4. The seller reviews the LC carefully to ensure all terms are achievable.
• 5. The seller ships the goods and prepares the required documents.
• 6. The seller presents the documents to their bank within the LC's validity period.
• 7. The advising bank checks the documents and forwards them to the issuing bank.
• 8. If the documents comply, the issuing bank pays the seller's bank, which credits the seller.

Types of Letters of Credit

Not all LCs are the same. The key types you will encounter in agricultural trade are:

• Irrevocable LC — cannot be amended or cancelled without the agreement of all parties. This is the standard type used in international trade and provides the strongest protection for the seller.
• Confirmed LC — the seller's bank adds its own guarantee of payment in addition to the issuing bank's. Used when the seller has concerns about the creditworthiness of the issuing bank or the political risk of the buyer's country.
• Sight LC — payment is made immediately upon presentation of complying documents.
• Usance (Deferred Payment) LC — payment is made at a future date (e.g. 60 or 90 days after shipment). Effectively gives the buyer a credit period.
• Transferable LC — allows the seller to transfer part or all of the LC to a third party (e.g. a supplier). Useful for intermediaries.

The Critical Importance of Document Compliance

The most important thing to understand about LCs is this: banks deal in documents, not goods. The bank will pay if — and only if — the documents presented match the LC terms exactly.

Even minor discrepancies can result in the bank refusing to pay (a "discrepant presentation"). Common discrepancies include:

• The description of goods on the Commercial Invoice does not match the LC exactly
• The Bill of Lading is dated after the latest shipment date specified in the LC
• The port of loading or discharge does not match the LC
• Documents are presented after the LC's expiry date
• The quantity or value on the invoice differs from the LC
• A required document (e.g. inspection certificate) is missing
• Spelling errors or inconsistencies between documents

What to Do When You Receive an LC

Before you ship a single bag of product, read the LC in full and check every condition against what you can actually deliver. Ask yourself:

• Can I ship by the latest shipment date?
• Can I present all the required documents within the presentation period?
• Does the description of goods match exactly what I am shipping?
• Are the port of loading and discharge correct?
• Are there any conditions I cannot meet (e.g. a specific inspection company, a specific vessel)?

Requesting Amendments

If any condition in the LC cannot be met, request an amendment from the buyer before shipment. Amendments must be agreed by both the buyer and the issuing bank. Do not ship goods hoping to resolve discrepancies afterwards — this rarely ends well.

Once you are satisfied that all conditions can be met, proceed with shipment and document preparation. Work closely with your freight forwarder and bank to ensure documents are prepared correctly and presented on time.

Getting Help with LC Transactions

LC transactions are complex, and errors are costly. If you are new to LC-based trade or are dealing with a particularly complex LC, seek professional guidance.

Quardman Global assists clients with LC review, document preparation, and compliance checking. Contact our team to discuss your transaction.