For UAE importers buying goods from overseas suppliers, agreeing how and when payment will be made is a key part of managing a trade transaction. A letter of credit (LC) can provide a documentary payment framework supported by a bank, provided the parties understand its conditions and limitations.
What is a letter of credit?
A documentary letter of credit is a bank undertaking to honour a complying presentation under the terms of the credit. Most LCs are issued subject to the ICC’s Uniform Customs and Practice for Documentary Credits (UCP 600), which sets out how banks examine documents. It is commonly used when buyers and sellers want a structured mechanism for documentary payment. An LC does not itself certify the condition or quality of goods.
How the process typically works
- The importer and exporter agree commercial terms, including shipment and documentary requirements.
- The importer applies to an issuing bank.
- The bank issues the credit, which is advised to the exporter through a bank.
- After shipment, the exporter presents the documents required by the LC.
- Banks examine the documents against the credit’s terms and the applicable rules.
- A complying presentation leads to payment or another form of honour according to the credit.
Questions importers should ask
- What collateral, facility or credit approval does the issuing bank require?
- Are shipment dates, expiry dates and document requirements realistic?
- Who bears bank charges, confirmation costs and currency exposure?
- What happens if presented documents contain discrepancies?
- Does the transaction require specialist review of sanctions, trade restrictions or goods documentation?
What an LC does not solve
An LC primarily addresses documentary payment obligations. It does not replace supplier due diligence, product inspection, logistics insurance or a clear underlying sale contract. Importers should separately manage commercial and operational risks.
Preparing a stronger application
Before approaching a bank, assemble the commercial invoice or pro forma invoice, purchase contract, shipment details and the proposed documentary conditions. Confirm the bank’s current requirements directly, because eligibility, fees and facility terms vary by institution and transaction.
Free download: Trade Finance Guide for Importers and Exporters (PDF).
How National Finance can help
National Finance supports UAE businesses with letters of credit, bank guarantees and wider trade finance structuring. Request a consultation to discuss your transaction before agreeing final terms with your supplier.
This article is general educational information, not banking, legal or financial advice. Terms are subject to the relevant bank’s approval.
By the National Finance Media Team