A letter of credit is a bank's own written promise to pay the seller a fixed sum once the seller presents documents matching the credit's own terms exactly. Anyone at a factory taking an order paid this way, a merchandiser confirming payment security before committing fabric, or an owner deciding whether to accept a new buyer's order, needs to know what that promise covers and what it does not.
Delta Garments meets this every time Northline Apparel places an order under a letter of credit, as Order B (the jeans)'s own fixed terms require. Mona, the merchandiser, cannot treat "the buyer opened a letter of credit" as the end of the question; she must know which bank made the promise and what could still go wrong even with one in place.
Without this skill, a factory can commit fabric and production against a payment method it believes is guaranteed, only to find later that the guarantee depends on conditions it never checked. This lesson states the rule a letter of credit follows and works through Order B (the jeans)'s own letter of credit as Delta Garments receives it.
You need: Track 15 Course 1 on payment methods, since this course builds directly on the payment-method spectrum already taught there; a letter of credit sits at the safer end of that spectrum for the seller.
By the end of this lesson you can:
Not covered here: reading a letter of credit's own detailed terms, such as its dates and its required documents, is lesson 15.2.2's own subject; discrepancies are lesson 15.2.3's own subject.
| Term | Meaning |
|---|---|
| Letter of credit | A bank promise to pay the factory once the shipping documents match the order. |
| Issuing bank | The bank that opens a letter of credit on the buyer's own instruction, promising to pay once compliant documents are presented. |
| Advising bank | The bank in the seller's own country that receives the letter of credit from the issuing bank and passes it to the seller, confirming it is genuine. |
| Confirming bank | A bank that adds its own promise to pay to a letter of credit already opened by the issuing bank, so the seller has two banks' promises instead of one. |
| Beneficiary | The party named in a letter of credit who is entitled to be paid once its documents comply, usually the seller or factory. |
| Applicant | The party who instructs its own bank to open a letter of credit, usually the buyer, and who must pay the bank back once it honours the credit. |
Once a buyer's bank opens a letter of credit, the bank itself, not the buyer, owes the payment, provided the beneficiary's documents match what the letter of credit states. This is the whole reason a letter of credit exists: it moves the seller's payment risk away from "does this buyer pay its bills" and onto "does a named bank keep its own written promise," which is a far safer question for a factory to answer, since banks are regulated and their promises are governed by internationally standard rules for letters of credit. The promise is conditional, not unconditional: it depends entirely on the documents complying, and on nothing else the buyer or factory might separately agree between themselves.
| What can differ | The shapes you will meet | Why it matters |
|---|---|---|
| A new buyer relationship, export, made to order, such as Order B (the jeans) for Northline Apparel | The issuing bank is a bank the factory has never dealt with before, so the factory's own bank may be asked to add a confirmation. | A confirming bank gives the factory a second, closer promise to rely on, useful when the issuing bank's own country carries more risk. |
| A long-standing buyer relationship, export, made to order | The same issuing bank opens letters of credit for many orders in a row, so the factory already trusts its record of paying on compliant documents. | Confirmation is requested less often once a bank's own payment record is proven, saving the confirming bank's own fee. |
| A domestic sale, such as Cedar & Co.'s own purchases from Delta Garments | No letter of credit is used at all; Cedar & Co. buys on 60-day open account instead. | A letter of credit is a cross-border tool built for buyers and sellers who do not already trust each other directly; it is largely irrelevant to a domestic relationship built on an ongoing account. |
| A hosiery, terry or home-textile order rather than a cut-and-sew garment order | The same four-party structure and the same conditional bank promise apply; only the shipped goods and their own documents differ. | Confirms the letter of credit's own structure is general to any exported, made-to-order goods, not specific to garments. |
Sara, the buyer at Northline Apparel, instructs Northline's own bank to open a letter of credit for Order B, the five-pocket jeans, at Order B's own fixed buyer target FOB of USD 9.80 per piece for 3,000 pieces. Northline's own bank, the issuing bank, sends the letter of credit to a bank in Egypt, the advising bank, which passes it to Delta Garments, the factory, named in the letter of credit as the beneficiary. Mona checks that the advising bank has confirmed the letter of credit is genuine before Delta Garments commits any fabric to Order B.
The worked numberOrder B's own fixed figures give the total value the letter of credit covers, and the portion already committed to fabric once cutting begins.
A common mistake is committing fabric and production to an order as soon as a factory hears a letter of credit has been opened, without checking which bank issued it, whether it has been advised through a bank the factory trusts, or what documents it actually requires. A letter of credit from an unfamiliar issuing bank, unconfirmed, still depends on that one bank's own promise being honoured and on the factory's own documents complying exactly; skipping this check does not remove the risk, it only hides it until the goods are already shipped.
A letter of credit is a written promise from a bank, not from the buyer, that says: pay this named seller a fixed amount once it hands over the right shipping papers. The buyer's own bank makes the promise, another bank in the seller's own country usually passes it along and checks it is real, and sometimes a second bank adds its own promise on top for extra safety. The whole promise only works if the seller's papers match exactly what the letter says; nothing else the buyer and seller agreed between themselves on the side changes that. For Delta Garments, this means checking who actually made the promise and what it depends on before committing a single metre of Order B's own denim, not simply trusting that a letter of credit means the money is already safe.
Sara, the buyer at Northline Apparel, emails Mona to say Northline has instructed its own bank to open the letter of credit for Order B and asks Delta Garments to start cutting immediately so the timeline is not lost.
The document Mona reads:
Should Mona instruct cutting to begin today, or wait for the advising bank to confirm the letter of credit has actually been received and verified? Decide before opening the answer.
Mona should wait for the advising bank's own confirmation before instructing cutting to begin.
First fact. A buyer's own email stating a bank "has opened" a letter of credit is not the same as the letter of credit itself arriving at a bank Delta Garments trusts; the promise this lesson describes is a bank's own promise, not the buyer's own word.
Second fact. Cutting Order B's own denim commits USD 13,920 that cannot be recovered once the fabric is cut to pattern; committing it against an unverified claim exposes that whole amount to the small but real chance the letter of credit never arrives as described, or arrives with terms Delta Garments cannot meet.
Waiting for the advising bank's own confirmation costs at most a few days against a 22-week production timeline; cutting early against an unverified letter of credit risks USD 13,920 of fabric that Northline has no obligation to pay for until a real, confirmed letter of credit exists.
Order B's own total order value under its letter of credit is USD 29,400 (9.80 × 3,000, from this lesson's own worked number), and USD 13,920 of that is already at risk in denim alone once cutting begins. Against a fixed FOB target of USD 9.80 per piece, committing that fabric before the advising bank confirms the letter of credit is genuine risks the full USD 13,920, about 47% of Order B's own total order value, for the sake of saving a few days against a 22-week production timeline.
Open the Letter of credit document checklist and record the letter of credit's own reference number, the issuing bank, the advising bank, and whether a confirming bank has been used, before any document is prepared against it. Later lessons in this course complete the checklist's remaining rows. Download link: `templates/T15-C02-letter-of-credit-document-checklist.xlsx`.
1. What does a letter of credit actually promise, according to this lesson?
2. In the worked scenario, why should Mona wait for the advising bank's own confirmation before cutting Order B's own denim?
| EN | AR | FR | TR | Meaning |
|---|---|---|---|---|
| Letter of credit | اعتماد مستندي | Lettre de crédit | Akreditif | A bank promise to pay the factory once the shipping documents match the order. |
| Issuing bank | البنك المُصدر | Banque émettrice | Amir banka | The bank that opens a letter of credit on the buyer's own instruction, promising to pay once compliant documents are presented. |
| Advising bank | البنك المُبلِّغ | Banque notificatrice | İhbar bankası | The bank in the seller's own country that receives the letter of credit from the issuing bank and passes it to the seller, confirming it is genuine. |
| Confirming bank | البنك المُثبِّت | Banque confirmatrice | Teyit bankası | A bank that adds its own promise to pay to a letter of credit already opened by the issuing bank, so the seller has two banks' promises instead of one. |
| Beneficiary | المستفيد | Bénéficiaire | Lehtar | The party named in a letter of credit who is entitled to be paid once its documents comply, usually the seller or factory. |
| Applicant | الآمر بفتح الاعتماد | Donneur d'ordre | Akreditif amiri | The party who instructs its own bank to open a letter of credit, usually the buyer, and who must pay the bank back once it honours the credit. |
The next lesson opens the letter of credit itself and teaches which of its own terms a factory must read and agree with before shipping a single piece against it. Back to the course map