Types of Letter of Credit: DLC, SBLC and the Rest
There are really only two families. A documentary credit (DLC) is a payment mechanism: the bank pays the seller when compliant documents are presented, so it is expected to be drawn on every shipment. A standby credit (SBLC) is a backstop: it is only drawn if the buyer fails to pay, so a healthy SBLC is never used at all. Every other name — confirmed, transferable, revolving, back-to-back, red clause, sight or usance — is a variation layered on top of those two, and each variation moves risk between the buyer, the seller and the banks.
🎯 Key Takeaways
- DLC pays on performance, SBLC pays on default. Confusing the two is the most common and most expensive error in this area.
- All credits under UCP 600 are irrevocable even when the credit does not say so. "Irrevocable LC" is now a tautology, not a feature.
- Confirmation is about the bank, not the buyer. You add it when you do not want the issuing bank's country or credit risk.
- Transferable is the intermediary's instrument, and a credit is only transferable if it expressly says so.
- Banks pay against documents, not goods. A compliant presentation gets paid even if the cargo disappoints; a perfect cargo with a discrepant document does not.
- "Leased" or "monetisable" SBLCs are a fraud pattern, not a product. No genuine bank leases its credit to a stranger.
Table of Contents
- What a Letter of Credit Does
- Documentary Credit (DLC)
- Standby Credit (SBLC)
- DLC vs SBLC Side by Side
- Confirmed and Unconfirmed
- Sight, Usance and Deferred Payment
- Transferable Credits
- Back-to-Back Credits
- Revolving Credits
- Red Clause and Green Clause
- Choosing the Right One
- What It Costs and Who Pays
- Fraud Patterns to Know
- Frequently Asked Questions
What a Letter of Credit Does
A letter of credit replaces the buyer's promise to pay with a bank's promise to pay. The buyer applies to its bank, the issuing bank sends the credit to a bank in the seller's country, and the seller ships knowing that payment now depends on a bank rather than on a counterparty it may never have met.
The critical principle is that the credit is independent of the sale contract, and banks deal only in documents. If the presented documents comply with the credit, the bank must pay, whatever is happening between buyer and seller. If they do not comply, the bank is entitled to refuse, however good the underlying cargo was. That single rule explains most letter of credit disputes.
Commercial credits are issued subject to the ICC''s Uniform Customs and Practice for Documentary Credits, UCP 600. Standby credits may be issued under UCP 600 or under the International Standby Practices, ISP98. The credit itself states which rules apply, and that line is worth reading before anything else.
Documentary Credit (DLC)
This is the classic instrument, and when a trader says "LC" without qualification this is usually what they mean. It is issued in favour of the seller and is drawn on every shipment. The seller ships the goods, assembles the documents the credit calls for — typically a bill of lading, commercial invoice, packing list, certificate of origin and an inspection certificate — and presents them to the nominated bank within the presentation period.
If the presentation complies, the bank pays. The buyer gets the documents, and with the bill of lading it gets the cargo. Everyone''s exposure is bounded: the seller is not relying on the buyer''s willingness to pay, and the buyer is not paying for a shipment that never happened.
The main practical risk sits with the seller and it is documentary. A significant share of first presentations under commercial credits contain discrepancies, most of them avoidable: dates out of sequence, a description that does not match the credit word for word, a late presentation, an inconsistency between invoice and transport document. A discrepant presentation does not necessarily kill the deal, since the buyer can waive, but it hands the buyer leverage at exactly the wrong moment.
Standby Credit (SBLC)
A standby credit is a guarantee wearing a letter of credit''s clothes. It is issued in favour of the seller but is meant to sit unused. The parties settle normally, often by telegraphic transfer or on open account, and the standby is only drawn if the buyer fails to pay. To draw it the beneficiary presents a demand and usually a statement that the applicant has defaulted, plus whatever evidence the credit requires — often just copies of the unpaid invoice and transport document.
Because it is documentary in form, the bank still pays against a compliant demand without investigating whether the default is genuinely disputed. That is what makes a standby powerful for the beneficiary and uncomfortable for the applicant, and it is why applicants negotiate hard over what the demand must contain.
Standbys are also used for things other than payment default: performance obligations, advance payment repayment, bid bonds. Where the instrument is a true demand guarantee rather than a standby, it will more often be issued under the ICC''s URDG 758 rules instead. The commercial effect is similar; the rulebook and the wording differ.
DLC vs SBLC Side by Side
| Factor | Documentary credit (DLC) | Standby credit (SBLC) |
|---|---|---|
| Purpose | Primary payment method | Security if payment fails |
| Expected to be drawn | Yes, every shipment | No, only on default |
| Documents required | Full shipping set | Demand plus a default statement |
| Usual rules | UCP 600 | UCP 600 or ISP98 |
| Suits | One-off or first trades with a new counterparty | Repeat flows where TT is efficient but unsecured |
| Main seller risk | Document discrepancies | Proving default under the stated terms |
| Buyer''s cash impact | Line utilised per shipment | Line tied up for the standby''s whole life |
Confirmed and Unconfirmed
Confirmation adds a second bank''s independent undertaking, normally a bank in the seller''s own country. Once a credit is confirmed, the seller can present to the confirming bank and be paid by it, regardless of whether the issuing bank pays or whether the issuing bank''s country allows funds out.
You pay for confirmation when you are worried about the issuing bank itself or the jurisdiction it sits in — country risk, currency transfer restrictions, sanctions exposure, or simply an institution nobody in your market has heard of. On a credit issued by a large bank in a stable jurisdiction, confirmation is usually an unnecessary cost.
Under UCP 600 a credit is irrevocable even if it does not say so, so "irrevocable confirmed LC at sight" describes two real features and one redundant word. The redundancy is harmless, but it tells you something about whoever drafted the request.
Sight, Usance and Deferred Payment
- At sight. The bank pays when a compliant presentation is made, within the time the rules allow for examination. Best for the seller''s cash flow.
- Usance, or acceptance. A draft is accepted and paid at a future date, commonly 30, 60, 90 or 180 days after the bill of lading date. The buyer gets financing; the seller carries the wait, or discounts the accepted draft for cash now.
- Deferred payment. Economically the same as usance but with no draft, so payment falls due on a stated future date.
The tenor is a negotiation about working capital, not about safety. A confirmed 90-day usance credit from a strong bank may be better security than an unconfirmed sight credit from a weak one.
Transferable Credits
This is the instrument that makes intermediated trading possible. A transferable credit allows the first beneficiary — the trader who sold to the end buyer — to transfer all or part of the credit to a second beneficiary, the actual supplier, who then ships and presents documents.
Under UCP 600 a credit is transferable only if it is expressly designated as such. Key mechanics worth knowing:
- The trader can substitute its own invoice and draft for those of the supplier, which is how the margin stays confidential.
- The amount and unit price can be reduced on transfer, and the expiry, presentation period and latest shipment date can be shortened. That reduction is where the trader''s margin lives.
- Partial transfers to several suppliers are possible if partial drawings are allowed under the credit.
- A second beneficiary cannot transfer onward, other than back to the first beneficiary. Long broker chains cannot each take a slice this way.
For anyone working as an intermediary, this instrument does what a stack of non-circumvention agreements tries and usually fails to do: it protects the position structurally rather than contractually.
Back-to-Back Credits
Where a credit is not transferable, a trader may ask its bank to issue a second, separate credit in favour of the supplier, using the incoming credit as comfort. These are two independent credits, not one credit passed along.
That independence is the problem. The trader''s bank must pay the supplier under the second credit whether or not the trader gets paid under the first, so the bank is taking real credit risk on the trader. Many banks decline back-to-back structures for this reason, or require the trader''s own facility to support them. Where a transferable credit is available, it is nearly always the cleaner route.
Revolving Credits
A revolving credit reinstates automatically, so the same instrument covers a series of shipments without a new credit each time. It saves issuance work on term supply deals — monthly cargoes of the same product to the same buyer.
Two dimensions to check. It can revolve by time (an amount available each month) or by value (reinstated once a drawing is settled). And it can be cumulative, where an unused amount rolls forward, or non-cumulative, where it lapses. A non-cumulative monthly credit combined with a delayed shipment can leave a seller with cargo afloat and no availability to draw against.
Red Clause and Green Clause
A red clause credit lets the beneficiary draw an advance before shipment, against a simple receipt and an undertaking to ship. It was built for agricultural trades where the seller needs cash to buy the crop. A green clause goes further and typically requires the pre-shipment goods to be warehoused in the bank''s name.
Both push risk onto the buyer, who has paid for something not yet shipped. They appear in established relationships and in commodity origination, not in first deals with unknown counterparties.
Choosing the Right One
| Situation | Usual answer |
|---|---|
| First trade with a new counterparty | Irrevocable documentary credit at sight |
| Issuing bank or country you do not know | Add confirmation by a bank you do |
| Regular shipments, same buyer | Revolving credit, or TT backed by a standby |
| You are the intermediary | Transferable credit |
| Buyer wants credit terms | Usance credit, discounted if you need the cash |
| Securing performance, not payment | Standby or a performance bond |
What It Costs and Who Pays
Charges vary widely by bank, country and the applicant''s credit standing, so treat any published figure as indicative and get a quote. The structure is more stable than the numbers: the issuing bank charges the buyer an issuance or commitment fee, usually quoted per quarter on the credit amount; the advising bank charges a flat advising fee; confirmation is priced on the issuing bank''s and country''s risk and is the item most likely to surprise you; amendments, discrepancy handling and document examination all carry their own fees.
The default is that each party pays its own banks'' charges, but the credit can allocate them differently, and the allocation should be settled in the sale contract rather than discovered when the first presentation is made. Discrepancy fees in particular are charged per presentation and are avoidable with careful document preparation.
Fraud Patterns to Know
- "Leased" or "rented" SBLC. Presented as a way to obtain an instrument without the assets to support it. Banks issue credits against a customer relationship and a facility; there is no genuine market in renting one out.
- SBLC "monetisation". An offer to convert an instrument into cash at a discount, usually requiring advance fees. The fees disappear.
- Credits from institutions nobody can find. If the issuing bank is not identifiable through normal channels and has no correspondent relationships, the credit is unusable whatever it says.
- Pressure to accept a non-operative credit. A credit that only becomes operative on some future event is not security; it is a promise to provide security later.
- Swift message screenshots as proof. An MT700 or MT799 reaches your bank through the network, not your inbox as a PDF. The same lesson as MT-103 proof of funds fraud.
Before the credit, the counterparty
No instrument fixes a counterparty who should not have been traded with. Lodfy verifies companies before they transact, so the party named in your credit application is one whose registration, ownership and sanctions position have already been checked. Payment terms then sit in the contract where they belong, alongside the Incoterms basis and the inspection regime.
Frequently Asked Questions
What is the difference between an SBLC and a DLC?
A documentary credit is the payment method and is drawn on every shipment. A standby is security and is drawn only if the buyer fails to pay. If a standby is being used, payment is happening some other way.
Is an SBLC the same as a bank guarantee?
They do a similar commercial job. A standby is documentary in form and is issued under UCP 600 or ISP98, while demand guarantees are commonly issued under URDG 758. The distinction matters most in which rules and which local law apply.
Are all letters of credit irrevocable?
Under UCP 600, yes. A credit is irrevocable even if it does not say so, so the revocable credit has effectively disappeared from practice.
Who pays for a confirmed letter of credit?
Usually the party that wants the confirmation, which is normally the seller, but it is negotiable and should be stated in the contract. Confirmation is priced on the issuing bank and its country, so the cost varies enormously.
Can a letter of credit be transferred more than once?
No. The first beneficiary can transfer to a second beneficiary, and the second cannot transfer onward except back to the first. Longer chains need a different structure.
What happens if my documents are discrepant?
The bank can refuse to pay. In practice it notifies the discrepancies and the buyer is asked to waive them, which usually happens when the buyer wants the cargo, but it gives the buyer leverage. Getting the documents right the first time is the whole discipline.
Which letter of credit is best for a first-time trade?
An irrevocable documentary credit at sight, confirmed if the issuing bank or its jurisdiction is unfamiliar. It is the most expensive to run and the least likely to end badly.