Hi I am Deepak from Peru. I've recently started an import business in the UAE, and one of my overseas suppliers wants payment through a Letter of Credit (LC). I already have a UAE business bank account, but I'm not sure how an LC actually works. Could you explain it?
Hi Mateo,
I'm Deepak Pant, and this is a question I receive quite often from businesses entering international trade for the first time.
A Letter of Credit (LC) is essentially a payment guarantee issued by your bank. Instead of paying your overseas supplier in advance, your bank promises to release the payment only after the supplier submits the required shipping documents exactly as agreed. This gives both the buyer and the seller greater confidence during international transactions.
Here's how it typically works:
- You and your supplier agree to use an LC as the payment method. You then apply for the LC through your UAE business bank, such as Emirates NBD, ADCB, or another trade finance bank.
- The bank reviews your application. Depending on your banking relationship and credit profile, the bank may ask you to provide a cash margin or collateral, which can range from 10% to 100% of the shipment value.
- The LC is issued through the SWIFT network to your supplier's bank overseas, confirming that payment will be made once all agreed conditions are fulfilled.
- After shipping the goods, your supplier submits documents such as the commercial invoice, bill of lading, and packing list to their bank. These documents are forwarded to your UAE bank for verification.
- If everything matches the LC terms, your bank releases the payment from your business account or approved trade finance facility. You'll then receive the shipping documents needed to clear your goods at the destination port.
Keep in mind that banks charge fees for this service. LC issuance charges generally range between 0.5% and 3% of the transaction value, along with SWIFT and document handling charges. Also, because the bank is guaranteeing payment, part of your available account balance or credit facility may remain blocked until the transaction is completed.
For import businesses, an LC is one of the safest payment methods because it protects both parties, you don't pay until the agreed documents are presented, and your supplier has the assurance that the bank will honour the payment once the terms are met.
