The letter of credit (LC) is the most widely used trade finance instrument in international commerce — and one of the most frequently mishandled. Understanding how LCs work and how to manage the documentation process correctly is essential for any business engaged in regular cross-border trade across Eurasia and GCC markets, where LC usage is the commercial standard for many transactions.
What a Letter of Credit Does
An LC is a bank’s commitment — on behalf of the buyer (applicant) — to pay the seller (beneficiary) a specified amount, provided the seller presents required documents within the agreed timeframe and in strict compliance with LC terms. The bank’s commitment substitutes for the buyer’s creditworthiness. This solves the core trust problem in international trade: the seller knows they will be paid by the bank as long as documentation is correct, and the buyer knows they will only pay once documents confirm goods were shipped as specified.
Types of LC Relevant to Eurasia Trade
Sight LC: Payment immediately upon compliant document presentation — typically 5–7 business days from presentation to payment. Usance (Deferred Payment) LC: Payment at specified future date (30, 60, 90, or 120 days). Provides the buyer with effective credit while maintaining seller payment security. Confirmed LC: Additional bank in seller’s country adds its own payment commitment. Recommended when seller has concerns about issuing bank creditworthiness or country political risk — relevant for several Central Asian market transactions. Revolving LC: Automatically reinstates after each drawing — appropriate for regular shipments under long-term supply contracts.
The Documentation Problem
Studies show over 70% of first LC presentations contain at least one discrepancy. Most common errors: goods description on invoice not matching LC exactly (including punctuation and abbreviations), late shipment or late presentation, missing or incorrectly endorsed documents, ports not matching LC terms. These errors are preventable through careful pre-shipment documentation review — a standard component of our trade facilitation service.
When to Use an LC
LCs are appropriate when: trading with a new counterpart without established credit history, trading in high-payment-risk markets (including several Central Asian and Gulf markets), handling high-value transactions where non-payment would cause significant financial harm, and when the buyer’s bank requires an LC for import financing. For established relationships with trusted counterparts at manageable transaction values, open account trading with appropriate credit management is more efficient. Our Central Asia market analysis covers specific payment structure considerations for Kazakhstan and Uzbekistan.
Related reading: Services · Central Asia Market Analysis · Import Export Compliance Eurasia