How to Get a Letter of Credit From a Bank

Quick Answer

What You Are Actually Asking the Bank For

A letter of credit is a bank's promise to pay a seller, on your behalf, once the seller presents documents that match the credit exactly. The bank is not buying goods and is not inspecting them. It is dealing in documents.

That single sentence explains most of the friction in the process. The bank takes on your payment risk, so it needs to be comfortable lending you its name. It also takes on document risk, so it will be strict about wording, dates, and clauses. A missing certificate or a one word discrepancy can stop a payment even when the goods are perfect.

A letter of credit is also not a loan in the ordinary sense. It is a contingent obligation that becomes a payment obligation when compliant documents arrive. In practice, the bank will usually require either a cash margin or a facility that lets it debit you when the documents are presented.

The Four Parties and Who Does What

Most credits involve four parties.

• The applicant, which is you, the buyer.
• The issuing bank, your bank, which takes the risk on you.
• The beneficiary, the seller.
• The advising bank, usually in the seller's country, which authenticates the credit and passes it on.

A confirming bank may be added when the seller wants a bank in their own market to add its own payment promise. Confirmation costs money and it shifts risk from the issuing bank's country to the confirming bank, which is why sellers in volatile markets often ask for it.

When a Letter of Credit Is Worth the Cost

A credit is expensive relative to a bank transfer. It earns its cost in specific situations.

• The seller will not ship without a bank payment promise, typically on a first order or a large order.
• The corridor or counterparty carries payment risk you cannot otherwise manage.
• Your contract or your buyer requires documentary proof of shipment and compliance.
• You need staged payments tied to documents rather than to trust.
• Your bank requires a credit because it is financing the purchase.

If you have a long relationship with a supplier, a deposit plus balance on conventional rails is almost always cheaper and faster. A credit is a risk management instrument, not a default payment method.

What the Bank Will Assess Before Approving You

Approval is a credit decision wrapped in a documentation exercise. Banks look at the same core questions.

Your banking relationship. How long you have banked there, transaction volume, whether your accounts are in good standing, and whether you have handled trade payments before.

Financial capacity. Filed accounts, management information, tax filings, and cash flow. A first time importer with no trading history will find the conversation harder than an established business.

The underlying trade. The contract or proforma invoice, the goods, the destination, the supplier, and whether the transaction makes commercial sense. A credit for goods you have never traded, at a price far from market, invites questions.

Country and bank risk. The beneficiary's country, the advising bank, and any sanctions or restrictions that apply.

Security. Whether the bank holds a cash margin, a deposit, a charge over assets, or an unsecured facility.

Bring a file rather than a request. Companies that arrive with a contract, a supplier profile, a cost sheet, and a clear repayment source get decisions faster than companies that arrive with an idea.

The Documents You Will Need

Requirements vary by bank and country, but the pack usually contains:

• Certificate of incorporation and constitutional documents.
• Tax registration and, where relevant, an import registration or licence.
• Audited or management accounts for the last two to three years.
• The sales contract or proforma invoice from the supplier.
• A written summary of the transaction, including goods, quantity, value, origin, destination, and shipment dates.
• Insurance arrangements for the cargo.
• Identification and proof of address for directors and signatories.
• Any import permit, quota approval, or standards certificate required by your market.
• A facility application form and, where security is offered, details of the assets pledged.

If your country requires an import declaration before the bank can release foreign exchange, add that document. In Nigeria, for example, the Form M and its supporting documents sit in front of the bank's processing, and missing it stops the application before the credit is even drafted.

The Application Flow, Step by Step

1. Confirm the commercial terms. Agree with the supplier that payment will be by documentary credit, and state the credit type, the expiry date, and the latest shipment date in the contract.
2. Ask the supplier for their bank details and preferred advising bank. Getting this wrong means an amendment later.
3. Draft the credit terms. List the exact documents required, the description of goods, the amount and tolerance, the port of loading and discharge, and the presentation period.
4. Apply to your bank. Submit the trade finance application with the full document pack.
5. Agree the security. Sign the facility letter if one is needed, and fund any cash margin.
6. The bank issues the credit and sends it to the advising bank, usually by authenticated messaging.
7. The advising bank authenticates and informs the seller. The seller checks that the terms are workable.
8. The seller ships and presents documents to their bank, which forwards them to the issuing bank.
9. The issuing bank examines the documents against the credit terms and either pays or raises discrepancies.
10. Payment is made at sight or on the deferred date, and the bank debits your account or your facility.

Steps three and nine decide whether the process runs smoothly. Tight drafting at the start prevents discrepancies at the end.

Drafting Terms That Do Not Cause Discrepancies

Discrepancies are the most expensive part of documentary credit because they delay payment and often trigger fees. They usually come from vague wording.

Write the document list precisely. Instead of "certificate of quality", write "certificate of quality issued by the manufacturer stating that goods conform to specification A, in one original". Instead of "full set of bills of lading", write "full set of three original clean on board bills of lading consigned to the order of the issuing bank, marked freight prepaid, notify applicant".

Give realistic dates. A latest shipment date that leaves no room for production is a discrepancy waiting to happen. A presentation period shorter than the shipping time guarantees a late presentation.

Use the internationally recognised rules. Most credits are subject to UCP 600, the ICC rules for documentary credits, and the ICC publication of UCP 600 is the authoritative text. Reading the articles on examination and discrepancies once will save more than it costs.

Finally, avoid over specifying. Every extra certificate is another document that can be missing.

The Fee Stack and What It Really Costs

The issuance commission is only one line. A realistic budget includes:

• Issuance commission, usually a percentage of the credit value per quarter or part quarter.
• Advising and confirmation fees, charged by the banks in the seller's market.
• Amendment fees, charged each time terms change.
• Discrepancy fees, charged per presentation that does not comply.
• Courier and handling charges for document movement.
• Margin or facility cost, which is the real cost if the bank holds your cash or charges interest.

For a rough comparison, a small credit may cost a few hundred dollars all in, while a large one can run into thousands. A bank transfer on conventional rails costs a fixed, visible fee and has no documentary machinery attached. That is why credits belong to the transactions that need them, not to routine supplier payments.

Alternatives Worth Considering

A standby letter of credit is a guarantee rather than a payment mechanism. It pays only if the applicant fails to perform, and it is used for performance security or advance payment protection. It is a different instrument with different wording, even though the names sound similar.

Documentary collections are cheaper. The bank handles documents but does not guarantee payment, so the risk sits with the seller.

Open account with a deposit is the cheapest and fastest route. You pay a deposit, then the balance on shipment or on arrival, using a conventional transfer. For trusted suppliers this is the sensible default. The United States government's trade portal sets out the main payment methods and the risk each one places on buyer and seller, and the trade.gov guide to methods of payment is a useful neutral reference. It stops at describing the instruments. DapsyPay covers the part that follows, sending the deposit and balance on conventional rails with no limits, an upfront fee, and delivery to the supplier's bank account.

Trade finance or supply chain finance can fund the gap between paying a supplier and being paid by your buyer, which is often the actual problem behind a request for credit terms.

Getting the Payment Leg Right

The credit settles the obligation. It does not always settle the cash. When the credit is drawn, funds still have to move to the beneficiary account, and when you pay a deposit or a balance outside the credit, that transfer has its own cost and timing.

This is where DapsyPay fits alongside a credit rather than replacing it. The platform runs on conventional rails such as SEPA and ACH, so a deposit or a balance payment arrives as a normal bank credit that the supplier can reconcile against the invoice. There are no limits on the amount, which matters when a balance payment runs to six figures, and payments are built for bulk sending when one shipment generates several obligations. The fee is shown before you confirm, so the payment leg is a known cost rather than a line that appears later on the statement.

For a broader view of how banks and payment institutions divide this work, our guide to what Banking Circle is and how infrastructure banking works explains the accounts and rails that sit under a payment platform. If you are also managing supplier or contractor payouts outside the credit, the workflow in our guide to paying contractors in multiple countries covers the data and timing side.

Common Mistakes

• Applying with a proforma invoice that does not match the contract.
• Naming the wrong advising bank and paying for an amendment.
• Writing document requirements loosely, then arguing about discrepancies.
• Setting a latest shipment date with no production buffer.
• Forgetting the import declaration or licence the bank needs before it can process.
• Assuming the credit replaces the need to pay, when the bank still debits you.
• Choosing a credit for a small routine order where a transfer would cost a fraction.
• Ignoring confirmation costs when the seller insists on a confirming bank.

Best Practices

• Negotiate credit terms before signing the supply contract.
• Build the document pack before you apply, not after.
• Have your bank review the draft credit wording before it is issued.
• Keep a checklist of every document and every date in the credit.
• Track the presentation period from the shipment date, not from arrival.
• Budget the full fee stack, including amendments and discrepancies.
• Use conventional transfers for deposits and balances outside the credit.

FAQ

Conclusion

Getting a letter of credit is a documentation project with a credit decision attached. Prepare the file, agree the terms with the supplier before you apply, draft the document list precisely, and budget the full fee stack rather than the headline commission.

Then keep the payment leg equally disciplined. A credit governs the obligation, but the money still has to move, on time, in the right currency, with a reference the supplier can match. Treat both halves as one process and the shipment, the documents, and the cash arrive in the order you planned.