The Complete Guide to Letters of Credit for UK Businesses (2026)

What is a letter of credit?

A letter of credit (LC) is a document issued by a bank (the issuing bank, on behalf of the buyer) that guarantees payment to the seller, provided the seller presents the correct documents confirming shipment and delivery within the terms agreed in the LC. The fundamental principle is that the bank's credit risk substitutes for the buyer's credit risk: the seller is no longer relying on the buyer to pay, but on the buyer's bank.

Letters of credit are governed by the International Chamber of Commerce's Uniform Customs and Practice for Documentary Credits (UCP 600), which provides a consistent legal framework across most countries. This standardisation makes them widely accepted in international trade, particularly in markets where payment risk is higher or where buyer and seller have no established relationship.

For UK importers, an LC provides reassurance to overseas suppliers that they will be paid as agreed, which can help secure better pricing, extended credit terms, or agreements with suppliers who would otherwise demand advance payment. For the supplier, the certainty of bank-backed payment allows them to ship goods and access pre-shipment finance against the LC.

Types of letter of credit

A sight letter of credit requires payment immediately upon presentation of compliant documents. The issuing bank (acting on the buyer's behalf) reviews the shipping documents and, if they comply with the LC terms, pays the seller. Sight LCs are used where the supplier requires immediate payment on shipment.

A usance (or deferred payment) letter of credit allows the buyer to defer payment for an agreed period after shipment, typically 30, 60, 90 or 180 days. The supplier ships the goods and receives payment at the agreed future date. This gives the buyer time to receive, inspect, process or sell the goods before payment falls due, effectively extending credit terms from the bank.

A standby letter of credit (SBLC) is a secondary payment instrument, triggered only if the buyer fails to make payment through the primary agreed mechanism. Unlike documentary LCs which are the primary payment method, SBLCs function more like a guarantee. They are commonly used in long-term contracts or service agreements where the parties want the security of a bank guarantee without requiring LC documentation for each transaction.

How to apply for a letter of credit

To apply for a letter of credit, the UK importer approaches their bank or a trade finance specialist like Spark Finance. You will need to provide: the sale contract or purchase order, the supplier's details (name, address, bank details), the LC terms (goods description, quantity, price, shipping terms, document requirements and expiry date), and your own business financial information.

Spark Finance works with specialist trade finance lenders on our panel who can issue LCs on behalf of UK importers. These lenders often have lower minimum transaction thresholds than high street banks and can move significantly faster. Applications for straightforward transactions are typically processed within three to seven working days.

Once issued, the LC is sent from the issuing bank to the supplier's bank (the advising bank) in the supplier's country. The supplier then ships the goods and presents the required documents to their bank. If the documents comply with the LC terms, payment is made according to the LC conditions.

LC documentation requirements and discrepancies

The documents required under a typical documentary LC include: a commercial invoice, a bill of lading or airway bill, a packing list, a certificate of origin, and sometimes an inspection certificate or insurance document. The exact requirements are specified in the LC and must be met precisely. Even minor discrepancies between the documents and the LC terms can result in payment being delayed or refused.

Discrepancies are more common than most businesses expect. Industry statistics suggest that around 70% of first presentations under LCs contain some form of discrepancy. Working with an experienced trade finance broker or freight forwarder who understands LC documentation requirements significantly reduces discrepancy risk and the associated delays and costs.

When to use a letter of credit vs open account or advance payment

An LC is most appropriate when: you are trading with a new overseas supplier for the first time and have not yet established mutual trust; the supplier's country carries elevated payment risk or political risk; the transaction value is large enough to justify the LC costs; or when your supplier requires an LC as a condition of doing business.

Open account trading (where the supplier ships and waits for payment) is cheaper but only works where the relationship is established and both parties trust each other. Advance payment (paying before shipment) is the highest risk for the buyer and should only be used with suppliers whose reliability is beyond question, typically in long-standing relationships or for low-value transactions.