A Documentary Letter of Credit (DLC) — often simply called an LC or L/C — is the most widely used payment instrument in international commodity trade. It is a bank's conditional undertaking to pay the seller, provided the seller presents the required documents within the specified timeframe.
How a DLC Works
- Buyer applies to their bank (issuing bank) to open an LC in the seller's favour
- Issuing bank sends MT700 via SWIFT to the seller's bank (advising/confirming bank)
- Seller ships goods and collects required documents (Bill of Lading, CoQ, CoQ, invoice)
- Seller presents documents to advising bank within the LC validity period
- Bank checks compliance — all documents must strictly conform to LC terms
- Payment released to seller (at sight or on deferred payment terms)
Key DLC Terms
- At sight — payment released immediately upon presentation of compliant documents
- Usance/deferred — payment deferred (e.g., 30, 60, 90 days after B/L date)
- Irrevocable — cannot be modified without all parties' consent (all modern LCs are irrevocable by default under UCP 600)
- Confirmed — the advising bank adds its own payment guarantee
- Transferable — seller can transfer LC rights to a third party (e.g., their supplier)
- Back-to-back — master LC used as collateral to open a second LC for the supplier
DLC vs SBLC
| Feature | DLC (MT700) | SBLC (MT760) |
|---|---|---|
| Purpose | Primary payment method | Standby guarantee (backup) |
| When drawn | On document presentation | On buyer default |
| Governs | UCP 600 (ICC) | ISP98 or UCP 600 |
| Common in | Regular commodity trade | First-deal security, performance bonds |
UCP 600 — The Governing Rules
All Documentary Letters of Credit in international trade are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce (ICC). Any LC that states "subject to UCP 600" is automatically bound by these rules, which standardise document requirements and bank obligations globally.
Frequently Asked Questions
- What is a DLC in commodity trade?
A Documentary Letter of Credit (DLC) is a bank's written commitment to pay the seller a specified amount upon presentation of compliant shipping documents (bill of lading, certificate of quality, invoice, etc.).
- What is the SWIFT format for a DLC?
DLCs are transmitted via SWIFT MT700 (Issue of a Documentary Credit). The issuing bank sends MT700 to the advising/confirming bank, which notifies the seller.
- What is the difference between an irrevocable and confirmed LC?
An irrevocable LC cannot be cancelled without the beneficiary's (seller's) consent. A confirmed LC additionally has a second bank's guarantee, protecting the seller if the issuing bank defaults.
- How long does it take to open a DLC?
Most banks can issue an LC within 2–5 business days of receiving the application and margin. The LC validity period is typically 30–90 days depending on the transaction.