What is a Letter of Credit at Sight?

An LC at Sight is a document that ensures payment of goods provided by an exporter to an importer. Learn more about its benefits in this blog.
LC at Sight
Letter of Credit (LC) is an important document in the export logistics process since it states payment terms between an exporter and importer. Among the varied types of LCs, a Letter of Credit at Sight is an important one. In an LC, banks serve as a bridge between the traders to secure the transaction. However, LC transactions might put either of the companies at risk since the exporter might have to wait for 30 to 90 days to receive payments. To avoid such circumstances, an LC at Sight is used.

All the shipping documentation listed in an LC’s terms and conditions must be provided by the exporter to receive payments. The bank releases payments once this is provided and they have been verified by the issuing bank.

What is the meaning of an LC at Sight?

An LC at Sight is a document that ensures payment of goods provided by an exporter to an importer. The money is paid when the former provides the LC at Sight and other required documentation. When all the conditions are satisfied, the payment is released. There are three parties involved in a Sight LC: importer, exporter and the issuing bank1.

How does an LC at Sight work?

An LC is a document offered by a third-party that guarantees payment of goods being shipped. The agreement outlines specific criteria for funds’ release. This can involve certain paperwork like proof of shipping and other bills – basis which the amount is payable to the beneficiary. The bank is given a certain period to complete the payment, usually no more than five working days.

Step-by-step process of how a sight LC works:

Step 1: Request for an estimate

An importer who requires goods contacts an exporter to request an estimate and finalize the transaction.

Step 2: Request for issuance of a Sight LC

The importer then goes to a bank (often one that has already given him a line of credit) and requests the bank to issue a Sight LC.

Step 3: Issuance of Sight LC by bank

After examining the importer’s creditworthiness, the bank issues a Letter of Credit at Sight and sends it to the exporter’s bank.

Step 4: Importer gets notified

The importer is then notified by the exporter’s bank and an LC is sent along with the trade transaction’s terms and conditions.

Step 5: Shipment of goods

When the exporter is satisfied with the LC, goods are shipped, post which he/she submits the shipping paperwork to the bank.

Step 6: Sight LC is sent to the importer’s bank

After processing the paperwork, the bank forwards it to the importer’s bank.

Step 7: Importer makes payment

The importer receives notification from the bank that the paperwork has arrived and that full payment needs to be made to collect them. To get product delivery, the importer requires these papers.

Step 8: Exporter’s bank receives payment

The importer examines the paperwork, pays for the LC, and then the importer’s bank transfers the funds to the exporter’s bank2.

What is the need for an LC at Sight?

A Letter of Credit at Sight offers protection to both the importer and exporter in a transaction. Below are some of its benefits:

Effective working capital management for exporters

Exporters have freedom to manage their working capital as they can receive payments against goods as soon as the shipment is on the way, which is one of the most beneficial benefits of a Sight LC. As a result, the exporter may not encounter a cash constraint and can effectively manage working capital.

Short payment terms

Usually, when an exporter gives an importer a credit term, it may last between 15 and 90 days. A Letter of Credit at Sight ensures that the exporter is paid earlier.

Competitive edge for the importer

Since the importer does not request for a credit period as such from the exporter, they are in a strong position to negotiate fair rates and conditions during trade. This provides a competitive advantage in the market.

Payment terms of LC at sight

The beneficiary will receive a Sight Letter of Credit once the supporting financial institution receives the necessary paperwork. The payment can be processed by the banking institution within an acceptable time frame, usually no more than five business days. Proof of shipment or the delivery of the importer's purchased merchandise are examples of the necessary documentation. Sight Letters of credit safeguard all parties to the transaction and mitigate some risks associated with doing business, particularly overseas transactions.

If the importer has a history of late payments and is at a higher risk of default, the exporter may include an at-sight clause in the contract. Transactions conducted at sight are typical when exporting commodities. Exporters who meet the standards specified in the letter may utilise a Sight Letter of Credit to guarantee payment.

Example of an LC at Sight:

An international business called A that sells consumables wants to import one million product bottles. They locate a manufacturing business B in India and discuss their requirements. After providing the complete price, the manufacturer requests an advance payment as security before starting manufacturing. The importer does not, however, want to take the chance of making an advance payment and later, not receiving goods.

In this case, both parties agree to use the ‘LC at Sight’ payment technique to avoid risk. All terms and conditions governing the trade agreement are accepted by the parties. Business A requests that its bank, a reputable US financial institution, issue a Letter of Credit at Sight to the exporter – Business B, which is located in India. All of the agreed-upon terms and conditions should be included in the LC.

The document is issued by the importer’s bank and delivered to the exporter’s bank in India. The exporter then receives the LC from the bank and begins the production process after reviewing the paperwork. When the goods are ready, the supplier ships them and delivers the packing bill and Bill of Lading to the Indian bank for review. The bank then sends the paperwork to the importer’s bank after checking for any inconsistencies.

After reviewing the documentation, the importer’s bank requests payment of LC amount to obtain the document. The importer, Business A, cannot obtain the documents without paying the LC amount since the bank has issued a Letter of Credit at Sight. Without it, the importer also cannot receive the goods that the exporter has delivered. The bank transfers the funds to the designated bank when the importer pays the amount and gets the necessary paperwork.

Contents of LC at Sight

Some of the details included in an LC at Sight are3:

1. Details of the importer’s bank (the institution issuing the Letter of Credit)
2. Details of the exporter
3. Date on which the letter is written
4. Details of the importer in the letter body and the details of the transaction taking place between the exporter and the importer.
5. Signature of the bank official

Difference between LC at Sight and Usance LC

A Usance LC lets the importer pay after delivery within a pre-determined period and is not required to pay immediately to get the documentation, unlike with Sight LCs. Usance LCs often offer a payment grace period of 30 - 120 days.

An LC is essential since it serves as the importer’s certificate of authenticity and keeps the parties informed. A business owner usually uses a Bill of Exchange and a Sight LC to receive required financing. Any sort of non-adherence can lead to non-payment or delay and disputes in payment. With e-commerce exports, reaching international customers and receiving payments is easy and simple. Amazon Global Selling not just enables you to sell across 200+ countries and territories but also receive payments directly in your bank in INR or other currency of your choice.

Sight vs Time Letter of Credit

A Sight Letter of Credit becomes due when the beneficiary presents the proof of shipment and other documents. Whereas in the Time Letter of Credit, certain days need to pass after submitting the Letter of Credit, proof of delivery, and other required documents before the payment becomes due.

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Frequently Asked Questions

Where is the Rubber Board of India situated?
A 90-day sight term in an LC indicates that the exporter will not receive payment till 90 days after submitting the shipment’s draft to the bank.
Can a sight LC be negotiated?
Yes, a sight LC is negotiable.
What are the benefits of a Letter of Credit at Sight?
A Letter of Credit at Sight offers benefits like effective working capital management for exporters, early payment benefits for the exporter, and a competitive advantage for the importer.
What is a Letter of Credit at Sight 30 days?
There can be a substantial gap between document submission from importers and the bank processing the payment. In this case, importers receive a grace period of 30, 60 or 90 days as per the terms in the LC. To reduce this payment waiting period of 30-90 days, a Usance LC or Sight LC is issued to the exporter.
What is a Usance LC Payable at Sight?
LC Usance Payable at Sight refers to an LC arrangement in which the exporter makes sight collection from the drawee bank that handles discounting while the importer makes an advance payment to the issuing bank, which provides financing to the importer.
Published on December 29, 2022.


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