Types and Uses of Letters of Credit

Do you know the various types of letters of credit and what they are used for?

We have put together 11 different types of letters of credit highlighting their nuances and how they are used in practice.

This sheet is ideal for

📑Contractors
👷‍♂️Manufacturers
🌾Commodity traders
👩‍💼Cargo underwriters
⛴️Import/export companies and
🚚Logistics and supply chain professionals

To help as a quick refresher before you conclude that deal!

We have included:

1. Commercial Letter of Credit (CLC)


Abbreviation: CLC

Definition: A standard type of LC used to facilitate payment in international trade transactions. It assures the seller of receiving payment, provided all terms and conditions in the LC are met.

Key Features:

Payment Assurance: Payment is made upon presentation of documents proving shipment and compliance with the LC terms.

Risk Mitigation: Reduces the risk of non-payment for the seller.

Documentary Nature: Payment is contingent on presenting specific documents, not on the goods or services themselves.

Use Case: An American company imports electronics from South Korea. The CLC ensures the Korean manufacturer gets paid once they ship the goods and present the required shipping documents to the bank.

Practical Example: A CLC is issued by the buyer’s bank to the seller’s bank, detailing the terms that must be fulfilled for payment to be released, such as bill of lading, invoice, and inspection certificates.

2. Standby Letter of Credit (SBLC)


Abbreviation: SBLC

Definition: Acts as a guarantee of payment issued by a bank on behalf of a client; it is called upon only if the client fails to fulfill their contractual obligations.

Key Features:

Safety Net: Provides a payment guarantee to the beneficiary.

Versatility: Can be used for both financial and performance guarantees.

Conditional: Only activated if the applicant defaults on the agreement.

Use Case: A Canadian construction company is contracted to build an office in Mexico. An SBLC assures the Mexican client that they will receive compensation if the company fails to complete the project.

Practical Example: The construction company’s bank issues an SBLC to the client’s bank, guaranteeing payment up to a certain amount if specific conditions, such as project milestones, are not met.

And 9 others.

Which of these have you used before?