What is a Letter of Credit (LC) in textile export? How does it work?

A Letter of Credit (LC) is a financial instrument issued by a bank on behalf of the buyer — guaranteeing payment to the seller upon presentation of specified shipping documents. It is the most secure payment method in international textile trade.

How an LC works step by step:

1. Indian exporter and foreign buyer agree on LC payment terms
2. Buyer's bank issues an LC — a conditional guarantee of payment
3. Indian exporter ships goods and presents documents to their Indian bank (commercial invoice, bill of lading, packing list, certificate of origin, etc.)
4. Indian bank checks documents match LC conditions
5. Buyer's bank pays the Indian bank — exporter receives funds

Types of LC:

• Sight LC: Payment on presentation of documents — fastest
• Usance LC: Payment after a credit period (30, 60, 90 days) from document presentation
• Irrevocable LC: Cannot be changed without both parties agreeing — standard type