What Is a Letter of Credit (LC)? A Complete Guide for Textile Merchandisers and Garment Exporters

Introduction

International trade involves buyers and sellers from different countries. When a clothing brand places an order with a garment manufacturer in Bangladesh, both parties need a secure payment method to complete the transaction.

The buyer wants to ensure that the goods are manufactured and shipped according to the agreed terms. On the other hand, the garment manufacturer wants assurance that payment will be received after fulfilling the contractual requirements.

This is where a Letter of Credit (LC) plays an important role.

A Letter of Credit is one of the most widely used payment security instruments in international trade. It is particularly important in the textile and garment export industry, where manufacturers regularly deal with overseas buyers.

In this article, we will explain what an LC is, how it works, its different types, required documents, and why it is important for textile merchandisers.

What Is a Letter of Credit (LC)?

A Letter of Credit (LC) is a financial document issued by a bank on behalf of a buyer (importer), promising to pay the seller (exporter) a specified amount of money, provided that the seller submits the required documents and complies with the terms and conditions of the LC.

In simple words, an LC is a bank's undertaking to make payment to the exporter when the exporter fulfills the specified documentary requirements.

For example:

A clothing brand in Australia places an order for 20,000 T-shirts with a garment factory in Bangladesh.

The buyer does not want to make the full payment in advance, while the manufacturer does not want to ship the goods without payment security.

Therefore, the buyer arranges an LC through its bank in favour of the Bangladeshi garment manufacturer.

After manufacturing and shipping the goods, the manufacturer submits the required shipping documents to its bank. If the documents comply with the LC terms, payment is made according to the LC conditions.

Parties Involved in a Letter of Credit

There are several parties involved in an LC transaction.

Applicant (Importer/Buyer)

The applicant is the buyer who requests its bank to issue the LC.

Beneficiary (Exporter/Seller)

The beneficiary is the seller who receives the payment under the LC, provided the required conditions are fulfilled.

Issuing Bank

The issuing bank is the buyer's bank that issues the LC in favour of the exporter.

Advising Bank

The advising bank is usually located in the exporter's country. It authenticates and advises the LC to the beneficiary.

Negotiating Bank

The negotiating bank examines the submitted documents and may purchase or negotiate the compliant documents according to the LC terms.

Confirming Bank

A confirming bank adds its own independent payment undertaking to the LC, subject to its terms and conditions.

How Does a Letter of Credit Work?

The LC process generally follows these steps:

Purchase Order Confirmation: The buyer places an order with the garment manufacturer and agrees on the product specifications, quantity, price, shipment date, and payment terms.

LC Application: The buyer applies to its bank to issue an LC in favour of the garment manufacturer.

LC Issuance: The issuing bank issues the LC and sends it to the advising bank in the exporter's country.

LC Advising: The advising bank checks the apparent authenticity of the LC and advises it to the exporter.

LC Checking: The exporter carefully checks all LC terms and conditions before starting production.

Production and Shipment: The manufacturer completes production, arranges inspection if required, and ships the goods within the stipulated shipment period.

Document Submission: The exporter submits the required shipping documents to its bank within the presentation period and before the LC expiry date.

Document Examination: The bank examines the submitted documents to determine whether they comply with the LC terms.

Payment: If the documents comply, the bank honours the payment according to the LC payment terms.

Different Types of Letter of Credit

There are several types of LC used in international trade.

Sight LC

A Sight LC is a type of LC under which payment is made at sight after the bank determines that the presented documents comply with the LC terms.

Usance LC

A Usance LC is a type of LC where payment is made after a specified period.

Common payment periods include 30, 60, 90, and 120 days.

Irrevocable LC

An Irrevocable LC cannot be cancelled or amended without the agreement of the relevant parties as required under the applicable rules.

Most modern commercial documentary credits are irrevocable.

Confirmed LC

A Confirmed LC is an LC where another bank, in addition to the issuing bank, adds its confirmation and undertakes to honour or negotiate a complying presentation according to the LC terms.

Transferable LC

A Transferable LC allows the first beneficiary to request the transferring bank to make the credit available to one or more second beneficiaries, if the LC specifically states that it is transferable.

Back-to-Back LC

A Back-to-Back LC is commonly used in the garment industry.

A Bangladeshi garment exporter receives an export LC from an overseas buyer. The exporter then uses that export LC as security to open another LC in favour of a fabric or raw material supplier.

This allows the manufacturer to procure fabrics, yarns, trims, and accessories required for production.

Red Clause LC

A Red Clause LC allows the beneficiary to receive an advance payment before shipment, subject to the conditions specified in the credit.

It is generally used when the exporter needs funds to prepare the goods before shipment.

Important Terms Used in a Letter of Credit

Every textile merchandiser should understand the following LC-related terms.

LC Term	Meaning
LC Number	Unique identification number of the LC
LC Value	Total amount covered by the LC
Applicant	Buyer or importer
Beneficiary	Seller or exporter
Issuing Bank	Bank issuing the LC
Advising Bank	Bank advising the LC
Expiry Date	Last date on which a presentation can be made
Latest Shipment Date	Last permitted date for shipment
Shipment Term	Agreed shipping condition
Presentation Period	Time allowed for presenting documents after shipment
Payment Term	Sight or deferred payment arrangement
Partial Shipment	Whether shipment in multiple lots is permitted
Transshipment	Whether goods may be transferred between vessels during transportation
Tolerance	Permitted variation in quantity or value, if specified

Documents Required Under a Letter of Credit

In the textile and garment export industry, several documents may be required for an LC transaction.

The exact documents depend on the buyer's requirements and LC conditions.

Commercial Invoice

A document showing the product description, quantity, unit price, total value, and other commercial details.

Packing List

A document containing details of carton numbers, sizes, quantities, gross weight, and net weight.

Bill of Lading (B/L)

A transport document issued by the shipping carrier or its agent for sea transportation.

Certificate of Origin

A document certifying the country where the exported goods originate.

Inspection Certificate

A certificate confirming that the goods have been inspected, if required under the LC.

Insurance Certificate

An insurance document covering the shipment when required under the agreed shipping terms and LC conditions.

Beneficiary Certificate

A certificate prepared by the exporter confirming specific information required by the LC.

Shipment Advice

A document or notice confirming shipment details, such as vessel name, shipment date, quantity, and invoice value, when required.

What Is a Discrepancy in an LC?

A discrepancy occurs when the documents submitted by the exporter do not comply with the terms and conditions of the LC.

Discrepancies can delay payment and create additional banking costs.

Common LC discrepancies include:

• Incorrect buyer or seller name.
• Incorrect invoice value.
• Difference between invoice and packing list quantities.
• Late shipment.
• Expired LC.
• Missing required documents.
• Incorrect description of goods.
• Late presentation of shipping documents.
• Incorrect consignee or notify party details.
• Inconsistent shipment information.

Example:

Suppose the LC specifies the latest shipment date as 15 November 2026, but the exporter ships the goods on 18 November 2026.

This may create a late-shipment discrepancy unless the relevant LC terms have been amended or otherwise addressed.

Therefore, exporters should carefully review the LC before shipment.

Importance of LC in the Garment and Textile Industry

The Letter of Credit plays a significant role in international garment business.

Benefits for Garment Manufacturers

• Provides a bank-backed payment undertaking, subject to documentary compliance.
• Helps manufacturers conduct international business.
• Supports raw material procurement through back-to-back arrangements.
• Reduces certain payment risks.
• Provides a structured banking process for export transactions.

Benefits for International Buyers

• Helps ensure that payment is made against documents complying with the agreed LC conditions.
• Allows buyers to establish specific shipment and documentation requirements.
• Reduces the need for advance payment in many transactions.
• Provides a formal payment mechanism through banks.

Responsibilities of a Merchandiser Regarding LC

A textile merchandiser plays an important role in managing LC-related activities.

The merchandiser should:

• Collect the LC copy from the commercial or banking department.
• Check the LC value against the confirmed purchase order.
• Verify the latest shipment date.
• Check the expiry date and presentation period.
• Verify the beneficiary and applicant details.
• Check the product description and PO references.
• Confirm whether partial shipment and transshipment are allowed.
• Coordinate with the commercial department regarding discrepancies.
• Ensure that production and shipment plans comply with the LC schedule.
• Coordinate with the shipping and commercial teams to prepare accurate documents.

Important: A merchandiser should never ignore an LC discrepancy. Any required amendment should be coordinated with the buyer and commercial department before proceeding.

What Is the Difference Between LC and TT Payment?

LC and TT are two commonly used payment methods in international trade.

Subject	LC Payment	TT Payment
Full Form	Letter of Credit	Telegraphic Transfer
Bank Involvement	Bank issues a documentary credit undertaking	Bank transfers funds
Payment Security	Subject to LC terms and compliant documents	Depends on agreed advance or settlement arrangement
Documentation	Specific documents required by LC	Depends on the commercial agreement
Payment Timing	Sight or deferred payment	Advance, partial, or after-shipment payment
Common Use	International trade transactions	International and domestic payments

TT stands for Telegraphic Transfer. It is an electronic bank-to-bank fund transfer.

Practical Example of an LC in the Garment Industry

Let's consider a practical example.

A clothing buyer from Australia places an order with a Bangladeshi garment factory.

Order Details:

• Product: 100% Cotton T-Shirt
• Quantity: 20,000 Pieces
• Unit Price: USD 4.00
• Total Order Value: USD 80,000
• Payment Term: 120 Days Usance LC
• Shipment: By Sea
• Destination: Australia

The buyer requests its bank to issue a USD 80,000 LC in favour of the Bangladeshi manufacturer.

After receiving and checking the LC, the manufacturer starts production.

Once production is completed, the manufacturer ships the garments and submits the required documents to its bank.

If the documents comply with the LC terms, payment is processed according to the 120-day maturity arrangement.

This example demonstrates how an LC facilitates international garment transactions between buyers and manufacturers.

Important Things to Check Before Accepting an LC

Before accepting or proceeding under an LC, the exporter should carefully check:

• Correct beneficiary name and address.
• Correct applicant details.
• LC amount and currency.
• Latest shipment date.
• LC expiry date and place of expiry.
• Payment terms and maturity calculation.
• Required shipping documents.
• Presentation period.
• Partial shipment permission.
• Transshipment permission.
• Port of loading and port of discharge.
• Incoterms and shipment conditions.
• Inspection and testing requirements.
• Bank charges and other applicable costs.

Any unclear or unacceptable condition should be discussed with the buyer and the commercial/banking department before production or shipment.

Conclusion

A Letter of Credit is an important financial instrument in international trade, particularly in the textile and garment export industry.

It creates a structured payment arrangement between buyers and exporters through banks. However, an LC does not guarantee payment regardless of circumstances. Payment depends on the terms of the credit and the presentation of complying documents.

For textile merchandisers, understanding LC procedures, payment terms, shipment conditions, and documentation requirements is essential for managing export orders successfully.

A proper understanding of LC can help merchandisers avoid shipment delays, documentation discrepancies, and unnecessary financial complications.

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