What is the Letter of Credit and how does it work?

Letter of Credit is an important document issued by bank to make export transaction seamless and safe. It is widely used in International Business Transactions. The letter of credit is a guaranteed issued by a bank of one person (buyer) to another person (seller) that at the completion of task, the bank of buyer will do the payment. In other words, for understanding the meaning in more detail here are some illustrations mentioned below:



A contract has been formulated between two parties i.e. Exporter (beneficiary) and Importer (applicant) for the purpose supplying of goods on the basis of Letter of Credit.

The Importer(applicant) as per agreed terms and conditions goes to his concern bank (Issuing Bank) and submit required documents to issue Letter of Credit in the name of Exporter (beneficiary).

After verifying all the requisite documents submitted by the Importer (applicant). Issuing Bank send the Letter of Credit to the Advising Bank. It is pertinent to mention here that Advising Bank is the bank generally located in the country of Exporter and is responsible for doing payment and transferring documents to Issuing Bank.

After receiving the Letter of Credit from Issuing Bank, the Advising bank informs the Exporter (beneficiary) about the same and asks him to do the needful.

Thereafter, the Exporter (beneficiary) sends the goods to the Importer (applicant) in accordance with the terms and conditions as agreed between them.

After sending the goods Exporter (beneficiary) approaches to Advising bank for issuance of payment and submit all the requisite documents to the Advising bank. Then advising bank makes payment to the exporter.

How many types of Letters of Credit are there?

There numerous types of Letters of Credit used depending upon the nature of business and transaction. The party into a trade contract chooses letter of credit of their choice. Here are some types of Letter pf Credit mentioned below for better understanding.

  • Revocable Letter of Credit

This type of Letter of Credit can be changed or revoked by the issuing bank or by the buyer at any time without any prior intimidation. This type of Letter of Credit totally works in the favor’s of the Buyer (applicant) and provides no protection to the Seller (beneficiary).

  • Irrevocable Letter of Credit

This type of Letter of Credit cannot be changed or revoked by the issuing bank or by the buyer at any time without any prior intimidation consent of the parties required for revocation of the same. This type of Letter of Credit totally works in the favour of both the parties whether its buyer or seller.

  • Confirmed Letter of Credit

This type of Letter of Credit is issued when the seller (beneficiary) has not confidence upon the issuing bank. Therefore, in such situation any other bank takes guarantee of the Letter of credit and this process is called Confirmed Letter of Credit

  • Unconfirmed Letter of Credit

No such guarantee by any other bank or financial institution is taken regarding letter of Credit.

  • Letter of Credit at Sight

This type of Letter of Credit is issued to the Seller (beneficiary) by the advising bank after he complies with the terms and condition of trade and produces requisite document.

  • Transferable Letter of Credit

When an intermediary is engaged or when one firm sells the goods of another company/producer, transferable Letter of Credit is utilised. The first beneficiary requests that the bank transfer the full or a portion of the payment to the second beneficiary. The initial beneficiary in this arrangement is usually a middleman or a corporation that sells another’s goods.

  • Un-transferable Letter of Credit

This Letter of Credit cannot be transferable to any other party and is only applicable to the person or beneficiary to which it has been issued.

  • Letter of Credit with Red Clause

In this kind of Letter of Credit, the seller (beneficiary) is party paid or receives some advance payment before supplying the good and services. The partly payment is issued when the said seller provides requisite documents to the advising bank. This part payment is done to assist the seller in purchasing raw material and for packaging and preparing goods.

  • Letter of Credit with Green Clause

This type of Letter Credit is an additional variant of Red Clause Letter of Credit. Therefore, this Letter of credit provides advance payment to the seller not only for raw material and packaging but also for the expense of pre-shipment, storage and insurance.

EuroMEA Legal Services has a highly qualified team of lawyers and experts which have extensive experience in drafting Letter of Credits. Our law firm team with the help of legal experts that works in a highly proficient manner in order to draft the Letter of Credit and secure the interest of our clients. Here are some of the key points required in drafting up of Letter of Credit.


  • Issuer Company Name and address with all details including phone number, zip code
  • Date of creating Letter of Credit
  • Details of order upon which the Letter of Credit is issued
  • Complete details of placing or receiving order
  • Terms and Conditions as specified for issuance of Letter of Credit
  • Completed details of the other party to whom Letter of Credit is to be send.
  • All facts to be completed while drafting Letter of Credit and it must include the mode of payment and the nature of the Letter of Credit.
  • Dispute Settlement Clause and which laws will govern the dispute

EuroMEA Legal Services, is committed to provide best advice and legal document drafting services to our clients. Therefore, in case if you need any suggestion or help in relation the matters related to drafting of Letter of Credit you can contact us freely. Our team is fully committed towards our client in order to perform their duty and in delivering out the positive results.