International trade payments
Letter of Credit at Sight: A Complete Guide under UCP 600
A sight letter of credit is the issuing bank's irrevocable undertaking to pay the seller as soon as it presents documents that comply with the credit. An L/C balances risk well for both sides but demands absolutely precise documents and higher bank charges.
- Exporter risk
- Risk level 2/5
- Importer risk
- Risk level 3/5
- Cost
- ●●●●●
- Applicable rules
- Documentary credits are governed by the ICC UCP 600 when incorporated, together with the examination practice in ISBP 821, the eUCP for electronic presentation and URR 725 for bank-to-bank reimbursement.
How it works
- The parties sign a contract providing for payment by sight L/C, an acceptable issuing bank, an opening deadline and the main terms.
- The buyer (applicant) applies to its bank to issue the L/C, providing a cash margin or using a credit line.
- The issuing bank sends an MT700 via SWIFT to the advising bank in the seller's country.
- The advising bank authenticates and advises the L/C to the seller; if requested, a bank adds its confirmation.
- The seller checks the L/C carefully and immediately requests an amendment (MT707) for any term it cannot meet.
- The seller ships, obtains the B/L, prepares compliant documents and presents them to the nominated bank within the deadline.
- The nominated bank or issuing bank examines the documents within a maximum of five banking days.
- If the documents comply, the bank pays; if there are discrepancies, the issuing bank may refuse or ask the applicant whether it will waive them.
- The buyer reimburses the issuing bank, receives the original documents and takes delivery.
Parties involved
- Applicant: the importer, who asks the bank to issue the credit.
- Issuing bank: the importer's bank, which undertakes to pay.
- Advising bank: authenticates and passes the credit to the seller, with no obligation to pay.
- Confirming bank: adds its own undertaking to pay in addition to the issuing bank.
- Nominated bank: the bank authorised to pay or negotiate under the credit.
- Reimbursing bank: reimburses the paying bank, where applicable.
- Beneficiary: the exporter.
Exporter
Advantages
- A bank undertaking to pay, independent of the buyer's goodwill.
- Paid as soon as compliant documents are presented.
- Easy to discount documents for early cash.
- With a confirmed L/C, issuing bank and country risk are removed.
Drawbacks
- Paid only if the documents comply; minor errors can lead to refusal.
- Advising, confirmation and negotiation fees are higher than for other methods.
- Still exposed to the issuing bank if the L/C is unconfirmed.
Importer
Advantages
- Pays only against documents proving timely shipment on the agreed terms.
- Can require an independent inspection certificate to control quality.
- Builds credibility with new suppliers.
Drawbacks
- Must provide a cash margin or use a credit line; opening costs are high.
- The bank does not guarantee the actual quality of the goods.
- Complex procedure; opening and amendments take time.
Cost
The buyer usually pays an issuance commission calculated as a percentage of the L/C amount per quarter or validity period with a minimum, plus amendment, payment and message fees. The seller usually pays advising fees, document checking and negotiation fees, a confirmation fee (which depends on the issuing bank and country risk), transfer fees and any discrepancy fee deducted by the issuing bank when documents are non-compliant. Field 71D of the MT700 shows which charges fall on whom, and the seller should push back if all charges are pushed onto it.
Practice in Vietnam
Vietnamese exporters most often run into discrepancies where the invoice description does not match the L/C, shipment or presentation is late, the C/O is the wrong form or its data does not match, the insurance document is dated after shipment, or the beneficiary name and address differ from the credit. When you receive an L/C, review it immediately with the advising bank and your forwarder: port of loading, port of discharge, latest shipment date, transhipment and partial shipment terms, the type of B/L, the consignee and any documents issued by third parties. For import L/Cs, Vietnamese banks will ask for the contract, a business plan and a cash margin depending on the company's credit line.
Common types of letters of credit
| L/C type | Features | When to use |
|---|---|---|
| Irrevocable | Cannot be amended or cancelled without the agreement of the parties concerned. Under UCP 600 every credit is irrevocable even if not stated | Default for all credits today |
| Confirmed | A second bank, usually in the seller's country, adds its own independent undertaking to pay | When the issuing bank or the buyer's country is high risk |
| Transferable | The first beneficiary may transfer all or part of the credit to a second beneficiary, under article 38 of UCP 600 | The seller is a trading intermediary and the real supplier is another party |
| Back-to-back | An intermediary uses the credit it received as the basis for its bank to issue a new credit to the supplier; the two credits are independent | When the master credit is not transferable or the intermediary wants to keep information confidential |
| Red clause | Allows the beneficiary to draw an advance before shipment | Sellers who need funds to buy raw materials, for example agricultural produce |
| Revolving | The credit amount is reinstated automatically after each drawing over a given period | Regular repeated shipments with the same partner |
Key MT700 fields
| Field | Name | What to check |
|---|---|---|
| 40A | Form of Documentary Credit | Type of credit, for example IRREVOCABLE or IRREVOCABLE TRANSFERABLE |
| 20 | Documentary Credit Number | The L/C number, to be quoted on documents where required |
| 31D | Date and Place of Expiry | Expiry date and place; ask for expiry in the seller's country |
| 40E | Applicable Rules | Usually UCP LATEST VERSION |
| 50 / 59 | Applicant / Beneficiary | Names and addresses of both parties; fix spelling errors at once |
| 32B / 39A | Currency Amount / Tolerance | Currency, amount and permitted tolerance |
| 41a / 42C | Available With By / Drafts at | Nominated bank, method of availability and draft tenor |
| 43P / 43T | Partial Shipments / Transhipment | Whether partial shipment and transhipment are allowed |
| 44E / 44F / 44C | Port of Loading / Discharge / Latest Date of Shipment | Are the ports and the latest shipment date workable? |
| 45A | Description of Goods | Goods, quantity, unit price and Incoterms® rule; the invoice must correspond |
| 46A | Documents Required | List of documents and the detailed requirements for each |
| 47A | Additional Conditions | Additional conditions, where unfavourable clauses often hide |
| 71D / 48 / 49 | Charges / Period for Presentation / Confirmation | Allocation of charges, presentation period, confirmation instructions |
The ten most common discrepancies and how to avoid them
- Late shipment after the latest shipment date: book early and request an amendment before expiry if the vessel is delayed.
- Late presentation or expired credit: calculate the 21-day period or the period in field 48 carefully, allowing for time to obtain the B/L and C/O.
- Invoice description not corresponding to the credit: copy the description in field 45A exactly onto the commercial invoice.
- Conflicting data across documents, such as weights, package counts or marks: produce all documents from one master data set and cross-check before presenting.
- B/L without an on-board notation or date: ask the carrier or forwarder for a shipped on board B/L with a clear date.
- Claused B/L noting damage to goods or packaging: check packing carefully and resolve issues before the carrier issues the B/L.
- Wrong consignee, notify party or endorsement: send the L/C terms to your forwarder in advance and approve the draft B/L.
- Insurance document dated after shipment or for too low an amount: insure before loading and for at least 110 percent of the CIF or CIP value.
- Wrong C/O form, wrong issuer or data not matching the invoice: check the C/O form and the FTA origin criteria as soon as the credit arrives.
- Missing documents, insufficient originals or missing signatures: build a checklist from field 46A and tick off every document before presenting.
Under UCP 600, data in documents need not be identical but must not conflict with each other, with the credit or with ISBP. If discrepancies are raised, the seller can still correct and re-present within the deadline, or ask the bank to seek the applicant's waiver.
Frequently asked questions
How does a confirmed L/C differ from an unconfirmed one?
A confirmed L/C carries the additional undertaking of a confirming bank, usually in the seller's country, so the seller is protected even if the issuing bank or the buyer's country runs into trouble. The confirmation fee is usually paid by the seller and depends on the risk.
How long do banks have to examine documents?
Under UCP 600 each bank has a maximum of five banking days following the day of presentation to determine whether the documents comply.
What should I do if discrepancies are raised?
Check the reasons at once, correct the documents and re-present if time allows. If they cannot be corrected, ask the buyer to waive the discrepancies or convert the presentation to a collection basis.
Can an L/C be used with EXW or DDP?
It can, but it is a poor fit. Under EXW the seller rarely obtains a transport document in its name, and under DDP the seller bears risk to destination while being paid against documents at origin; FCA, FOB, CFR, CIF, CPT or CIP work better.
This content is for general guidance and does not replace legal or banking advice for a specific transaction.
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