L/C · 2026-05-21 · 12 min read

Letter of Credit step by step, 5 lifecycle stages, discrepancy, SWIFT

L/C as a documentary payment instrument across its 5 stages (preparation → SUBMITTED → ACCEPTED → DISCREPANCY → CLOSED), UCP 600 references, the most common discrepancies, and MT 700/710/750 messages.

What is an L/C for?

A letter of credit (L/C) is a binding bank commitment that "I will pay if compliant docs are presented", used when mutual trust between buyer and seller is low. The seller offloads buyer non-payment risk to the bank; the buyer prevents the seller from being paid without sending docs. It runs under UCP 600 and is a documentary instrument , everything must be right on paper.

Parties

  • Applicant: The buyer, the party requesting the L/C.
  • Beneficiary: The seller, the party receiving the payment.
  • Issuing Bank: The buyer\'s bank, issues the L/C.
  • Advising Bank: The seller\'s bank, forwards the L/C to the seller.
  • Confirming Bank (optional): A bank in the seller\'s country that strengthens the payment guarantee.

5 lifecycle stages

1. PREPARED

L/C not opened yet, parties are negotiating the contract. L/C terms are still up for negotiation: required docs, latest shipment date, period for presentation, Incoterm, payment terms, partial shipment allowed, transshipment allowed. Critical for the seller: catch any unacceptable term before negotiation closes.

2. SUBMITTED

The buyer opens the L/C with their bank. SWIFT MT 700 is sent to the seller\'s bank. The seller\'s bank advises the seller. First job for the seller: review the L/C wording. Any deviation from the contract (wrong amount, wrong Incoterm, missing doc, short window) → request an amendment (MT 707) before any shipment.

3. ACCEPTED (Shipment + Presentation)

The seller ships before the latest shipment date and presents all docs (B/L, commercial invoice, packing list, CO, insurance, etc.) to the bank within the presentation period. The bank has 5 banking days to review. If clean: SWIFT MT 754 "docs clean, payment to follow".

4. DISCREPANCY, if any

If the bank finds a mismatch, it sends SWIFT MT 750 to the buyer and holds payment. Common discrepancy causes:

  • Date error (B/L date after latest shipment date)
  • Amount mismatch (invoice USD 100,000, L/C USD 99,500)
  • Wrong Incoterm (L/C says CIF, B/L says FOB)
  • Spelling errors (LC Sighthem vs SIGHTHEM, inconsistent on docs)
  • Missing document (CO requested, not provided)
  • Signature missing

Resolutions: (a) buyer accepts the discrepancy (acceptance), payment proceeds; (b) docs can be corrected and re-presented (if time remains); (c) no payment, the seller negotiates with the buyer or pursues legal remedies.

5. CLOSED

Payment to the seller (sight L/C = immediately; usance/deferred L/C = on maturity). Docs reach the buyer\'s bank; buyer clears goods. L/C closes; commissions are charged to both parties.

SWIFT messages, briefly

  • MT 700: L/C issuance (issuing → advising).
  • MT 707: Amendment.
  • MT 710: Transfer to a third party.
  • MT 750: Discrepancy notice.
  • MT 754: Docs clean, payment confirmed.
  • MT 799: Free-format correspondence.

7 disciplines to avoid discrepancies

  1. Don\'t ship before reading the L/C wording. If anything deviates from the contract, request an amendment.
  2. Consistent company name spelling on all docs. "Sighthem Ltd." or "SIGHTHEM Ltd.", pick one and stick.
  3. Date discipline. B/L date before latest shipment date; presentation before presentation period. Watch holidays.
  4. Amount clarity. "Approximately" or "about" implies ±10% tolerance; otherwise the exact amount is required.
  5. Incoterm consistent with docs. CIF → B/L "Freight Prepaid"; FOB → "Freight Collect".
  6. Signatures and stamps. Where requested, missing signature is a 20%+ discrepancy cause.
  7. On your first L/C, have a forwarder or bank specialist read the wording. Interpreting alone carries open-ended risk.

How Sighthem manages this

Sighthem\'s L/C module:

  • Tracks the 5 lifecycle stages; each transition writes to the audit log.
  • Cron alerts on latest shipment and presentation deadlines (3 days ahead).
  • Document slot/version management, B/L, invoice, packing list, CO; each version with timestamp.
  • Discrepancy validation: basic checks between L/C wording and presented docs.
  • SWIFT messages (MT 700/707/750/754) attached and summarized.

Frequently Asked Questions

How much does an L/C cost?

Issuance fee (buyer's bank): ~0.2-0.5% per quarter; confirmation fee (if any): 0.1-0.3% per quarter; SWIFT message fee: USD 50-100. Total typically 0.5-1.5% of goods value. When mutual trust is low, think of it as paid risk insurance.

Can an L/C be cancelled?

L/Cs are issued "irrevocable" by default, no unilateral cancellation. Amendments require consent from seller, buyer, and the banks. "Revocable" exists in theory but is not used in practice.

What is a discrepancy?

A mismatch between the L/C wording and the presented docs (date, amount, Incoterm, missing document, typo). When the bank finds a discrepancy, payment stops, it waits for buyer acceptance. Common: 70%+ of export L/Cs catch discrepancies on first review.

What is UCP 600?

ICC's rule set for letters of credit (Uniform Customs and Practice for Documentary Credits, 6th issue). Defines the L/C flow, document review windows (5 banking days), discrepancy handling, payment obligation. Every modern L/C references UCP 600.

Turkish or English?

English, SWIFT messages are in English, and documents are expected in English too. Turkish can be added but must match the L/C wording. Turkish number formatting (1.000,00 vs 1,000.00) is a frequent source of mismatch; be careful.

RelatedIncoterms 2020 guide · Glossary (L/C section) · Try Sighthem