Letters of Credit for U.S. Importers: A Working Guide for Finance Teams

Many first-time U.S. importers send their payments to overseas suppliers using a wire transfer. The factory invoices, the buyer initiates a SWIFT wire through their bank, then the supplier confirms receipt and ships. Since the flow is simple and fast, it can work for established trading relationships. Trouble may arise when the relationship is new, the goods are high value, or the timing risk runs both directions. The buyer might worry the goods will not arrive as ordered, and the supplier might worry the buyer will not pay.

A letter of credit (LC) can be the answer. A documentary letter of credit substitutes a bank's promise to pay for the buyer's promise to pay. The supplier ships against documents, the bank reviews the documents, and the bank pays the supplier regardless of what happens between buyer and supplier.

This guide walks through how documentary letters of credit actually work, confirmed and unconfirmed structures, typical bank fees, and when an LC clearly beats a wire or open account. For finance teams managing international payments alongside ACH and wires, we also discuss how Slash’s international payments and multi-entity management features fit into the picture. Slash gives finance teams a centralized view of balances, payments, approvals, and entity activity across their organizations. Businesses can send international wires, manage treasury activity, and move funds across multiple payment rails from a single dashboard rather than stitching together separate banking tools.¹

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How a Letter of Credit Works for U.S. Importers

A letter of credit is a bank-backed promise that a seller will be paid once they provide the documents required by the underlying purchase agreement between a buyer and seller. You can think of it as a conditional IOU issued by the buyer’s bank; instead of relying solely on the buyer’s promise to pay after goods are shipped, the seller relies on the bank’s commitment. If the required documents are submitted correctly and on time, the bank releases payment.

Most letter of credit transactions involve four parties:

Applicant (the buyer/importer): The company purchasing the goods. The applicant asks its bank to issue the letter of credit and agrees to repay the bank once payment is made to the supplier.
Issuing bank: The buyer’s bank. This is the bank that creates the letter of credit and promises payment if the supplier submits the required documents correctly.
Beneficiary (the seller/supplier): The company selling the goods. The beneficiary ships the goods, gathers the required shipping and transaction documents, and submits them to receive payment under the letter of credit.
Advising or negotiating bank: A bank in the supplier’s country that receives the letter of credit from the issuing bank and passes it along to the supplier. This bank may also review the documents and help process payment. In some transactions, it adds its own payment guarantee as well.

Letters of credit exist because international trade inherently involves a trust problem. The buyer does not want to send money before goods arrive, and the seller does not want to ship goods before getting paid; the distances involved mean that some system must be in place to ensure that parties are held accountable, so the banks sit in the middle to help reduce risk for both sides.

Because the bank is not physically inspecting the goods or supervising the shipment itself, the bank instead relies on paperwork that proves the transaction happened the way both parties agreed. For example, if a supplier in Vietnam ships inventory to a buyer in the United States, the bank might require a bill of lading showing the goods were loaded onto the vessel, a commercial invoice showing the amount owed, and an insurance certificate covering the shipment.

Here’s how a typical documentary LC transaction goes:

The buyer and supplier agree to use a letter of credit in their purchase contract.
The buyer asks its bank to issue the LC, and the bank evaluates the buyer’s credit before approving it.
The issuing bank sends the LC to a bank in the supplier’s country, which authenticates it and notifies the supplier.
The supplier ships the goods and submits the required documents, such as the invoice and bill of lading, to receive payment.
The banks review the documents to confirm they match the LC terms. If everything complies, the supplier is paid and the buyer receives the documents needed to claim the shipment.

Different Types of Letters of Credit for Importers

Letters of credit are usually categorized in two ways: when the supplier gets paid and which bank guarantees payment.

Sight vs. usance letters of credit

The distinction between sight and usance LCs exists because buyers and suppliers often have different cash flow needs. Suppliers usually want payment as quickly and predictably as possible, while importers often want time to receive inventory, generate sales, and collect revenue before cash leaves the business. The LC structure can be adjusted to accommodate either side.

A sight letter of credit pays the supplier shortly after shipment documents are submitted and approved by the banks. The supplier ships the goods, provides proof of shipment, and receives payment soon afterward. For buyers, a sight LC functions similarly to paying cash once the shipment is confirmed.

A usance letter of credit, also called a term LC, delays payment until a future date, often 30, 60, or 90 days after the documents are accepted. The supplier still receives a bank-backed promise of payment, but the buyer gets additional time before cash leaves the account. This structure is commonly used when importers want time to receive and sell inventory before paying the LC balance.

Sight LCs are simpler and usually cheaper, while usance LCs provide more working capital flexibility for the buyer.

Confirmed vs. unconfirmed letters of credit

The distinction between confirmed and unconfirmed LCs exists because not all banks and countries carry the same level of financial or political risk. A supplier may trust the buyer but still worry about whether the buyer’s bank can actually honor the payment obligation if economic conditions change.

An unconfirmed letter of credit is backed only by the issuing bank (the buyer’s bank). The advising bank in the supplier’s country helps authenticate and process the LC, but it does not guarantee payment itself. This structure is common when the issuing bank is well known and operates in a stable market.

A confirmed letter of credit adds a second payment guarantee from another bank, usually one the supplier trusts. If the issuing bank cannot pay because of financial problems, political instability, or currency restrictions, the confirming bank is still obligated to honor the LC if the documents comply.

UCP 600: The Rules That Govern Documentary Letters of Credit

Documentary letters of credit are governed by the Uniform Customs and Practice for Documentary Credits, currently UCP 600, published by the International Chamber of Commerce. Almost every commercial LC issued today incorporates UCP 600 by reference. The framework is short, but a few principles drive most of the practical questions importers encounter:

Strict compliance and discrepancies: UCP 600 expects documents to comply strictly with the LC's terms. Small inconsistencies like a misspelled vessel name or an incorrect date count as discrepancies even when the underlying shipment was correct. When documents are discrepant, the issuing bank may refuse to honor the LC unless the buyer agrees to waive the discrepancies.
Examination period: UCP 600 gives the bank up to five banking days to examine documents and decide whether they comply. Once that window closes, the bank must either honor the credit or notify the presenter of refusal with specific reasons. Late objections are not allowed.
Independence principle: The LC is a separate contract from the underlying sales contract. A dispute between buyer and supplier about the goods does not, by itself, allow the buyer to stop payment under the LC. The bank's payment obligation runs on the documents; once the LC is issued and documents conform, payment goes through even if the goods arrive damaged or wrong.

Common Letter of Credit Fees Explained

LC pricing varies by bank, country, transaction size, and risk profile, but most importers encounter the same general categories of fees:

Issuance fees: The issuing bank charges a fee to create the LC. This is usually quoted as a percentage of the LC amount, often with a minimum dollar charge. For many U.S. trade finance banks, issuance fees commonly range from 0.1% to 1% of the LC value.
Confirmation fees: If a second bank adds its own payment guarantee, that bank charges a confirmation fee. Pricing depends heavily on the issuing bank’s credit quality and the country involved, but fees often range from 0.5% to 2% of the LC amount.
Amendment fees: Changes made after the LC is issued, such as extending the expiration date, increasing the amount, or modifying required documents, usually trigger amendment fees. These commonly range from $50 to $300 per change.
Discrepancy fees: Banks charge discrepancy fees when the submitted documents do not exactly match the LC terms. Common issues include inconsistent dates, missing signatures, or document wording that differs from the LC requirements. These fees often range from $75 to $150 per discrepancy and are usually charged to the supplier, though costs are sometimes negotiated back to the buyer.
Document handling fees: Banks may also charge processing fees for reviewing and routing shipment documents. These fees are typically smaller, often between $50 and $150.

A documentary letter of credit is much more expensive and operationally involved than simply paying an overseas supplier by wire transfer. A standard international wire from a U.S. business bank may cost $25 to $50 plus foreign exchange spread, while an LC transaction can generate $1,500 to $5,000 or more in issuance, confirmation, amendment, and document-processing fees. Businesses use letters of credit because they solve problems a normal wire does not. An LC reduces counterparty risk, gives suppliers confidence to ship goods internationally, and can provide short-term trade financing for the importer.

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When to Use a Letter of Credit Instead of Simpler Payment Terms

A letter of credit is not just another way to move money internationally. It is a trade finance structure designed to reduce risk between buyers and suppliers. The actual payment may still happen through a wire transfer underneath the process, but the LC adds bank guarantees, document controls, and sometimes short-term financing that a normal wire or open-account arrangement does not provide. Here’s when an LC makes the most sense, and when a simpler option may be better:

Relationship maturity

First-time orders with a new supplier are one of the most common LC use cases. Neither side fully trusts the other yet, so the LC allows the transaction to move forward without either party taking all the counterparty risk. As the relationship matures and both sides build confidence through successful shipments, many businesses may move to simpler arrangements such as open-account terms or standard international wires after shipment.

Order value and goods type

Letters of credit involve fixed bank fees and document review requirements, so they are often impractical for small orders. A $5,000 test order rarely justifies the administrative cost of an LC, while a $250,000 inventory purchase may. LCs are especially common for commodities, manufacturing orders, and customized goods because the transaction already depends on detailed shipping and inspection documentation for customs and quality control purposes.

Country and currency risk

LCs are also useful when suppliers operate in countries with unstable banking systems, foreign exchange restrictions, or elevated political risk. In these situations, suppliers may not trust that a simple wire payment will move reliably across borders or arrive in usable local currency. A confirmed LC can reduce that concern by adding a payment guarantee from another bank the supplier trusts, often one in the supplier’s own country.

Improve International Payment Operations with Slash

Letters of credit solve a specific trade-finance problem: reducing risk between buyers and suppliers during international transactions. But importers still need infrastructure for the day-to-day movement of money around those transactions, including supplier deposits, international wires, domestic settlements, treasury management, and reporting across multiple entities.

Slash is a business banking platform built for those operational workflows. Businesses can send international payments to 180+ countries through ACH and wire rails, move funds domestically through RTP and FedNow, and manage USD-pegged stablecoin transactions from the same dashboard. That gives finance teams flexibility when coordinating supplier payments, inventory purchases, and cross-border cash movement.

The platform also includes multi-entity management for businesses operating across multiple LLCs or subsidiaries. Finance teams can switch between entities from a single dashboard, monitor balances and transactions in real time, and keep reporting centralized rather than fragmented across separate banking portals.

Other helpful Slash features include:

Global USD: The Slash Global USD Account is designed as an alternative for foreign founders who want access to USD without forming a US entity.³ Balances are backed by Slash’s USDSL stablecoin, which is matched one-to-one in value with the US dollar.
AI-powered finance: Our platform comes with Twin, a built-in AI agent that can be prompted with natural language to complete complex tasks. Users can ask it to create cards, pay invoices, review your cash flow, and much more.
Slash Visa® Platinum Card: The Slash Card allows you to set customizable spending controls and issue unlimited virtual cards for handling team expenses, vendor payments, subscriptions, and more. Users can also earn up to 2% cash back on business purchases (U.S. only).
Working capital financing: Access short-term financing with flexible 30-, 60-, or 90-day repayment terms to help bridge cash flow gaps.⁵
High-yield treasury: Earn up to 3.79% annualized yield on idle funds with money market investments from BlackRock and Morgan Stanley, managed directly within your Slash account.⁶

When a letter of credit is the right tool, your trade-finance bank can handle the issuance, and Slash can handle the surrounding payments and consolidated reporting. Get started today.

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Frequently Asked Questions

How long does it take to set up a letter of credit?

A straightforward documentary LC typically takes 5 to 10 business days from application to issuance, assuming the buyer's credit application is already approved at the issuing bank. First-time applicants who need to open a trade-finance line should plan on several weeks for the underwriting before the first LC can be issued. Once a line is in place, subsequent LCs are usually faster.

What documents are typically required under a documentary letter of credit?

Common documents include the commercial invoice, bill of lading or air waybill, packing list, certificate of origin, insurance certificate, and inspection certificate. Specialized trades may add quality certificates, fumigation certificates, or shipping reports. The exact list is negotiated between buyer and supplier and written into the LC text.

What’s the difference between a documentary letter of credit and a standby letter of credit?

A documentary LC is a payment instrument that pays the beneficiary when commercial documents are presented under a trade transaction. A standby LC is a guarantee instrument that pays the beneficiary only if the applicant fails to perform on an underlying obligation, such as paying an invoice on open-account terms or completing a construction project. Both involve bank credit, but their function in the transaction is different.