LC (Letter of Credit)

What is a letter of credit? An LC (letter of credit) is a bank undertaking to pay the seller when compliant documents are presented. Letter of credit meaning in fabric trade: payment security through banks, not a guarantee that fabric quality matches your lab dip—unless the credit and contracts are written that way.

How an LC works (document path)

1. Buyer’s bank issues the LC.
2. Seller ships fabric under the agreed Incoterms (often FOB or CIF).
3. Seller presents documents—typically commercial invoice, packing list, bill of lading, certificate of origin, and any LC-required extras.
4. Banks check documents against the LC. Exact match → payment path proceeds.
5. Buyer uses documents to claim cargo.

Banks examine papers, not your warehouse inspection, unless the LC demands specific inspection certificates.

Why textile traders still use LCs

• First deals between parties with limited history
• Larger programs where payment default risk is material
• Markets or counterparties where open-account TT feels too exposed

Cost and friction (fees often in the order of a fraction of a percent to a couple percent depending on banks and structure, plus document work) mean many ongoing mill relationships later move to T/T with deposit + balance against copy documents—only after trust exists.

Common LC types (buyer shorthand)

Document discrepancies kill speed

Typical rejects: wrong beneficiary name form, quantity mismatches vs packing list, missing LC phrases, late presentation, or B/L details that do not match the credit. Sellers should read the LC before production locks, not after goods sail.

LC vs TT (high level)

What buyers should fix before the LC is issued

• Incoterms + named place already on the PO (not rewritten only in the credit)
• Fabric description language the mill can print truthfully on the commercial invoice
• Latest presentation and shipment dates that match real lead time
• Document list that matches how fabric actually ships (rolls, packing list form, COO if needed)

For commercial terms that sit beside payment (Incoterms, MOQ, lead time), see FOB, MOQ, and lead time. For program questions, contact.