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What is a letter of credit at sight? Meaning, working process, and example

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.

Documentation is critical in international trade for clarity, compliance, and trust between exporters and importers. Proper documentation facilitates smooth customs clearance and timely payments. Letters of credit (LCs) are a vital part of the export logistics process as they define the payment terms between an exporter and importer. A letter of credit at sight is a type of letter of credit that defines the payment period for an export transaction. Learn more about its meaning, process, and benefits in this blog.

What is the meaning of an LC at Sight?

A letter of credit at sight or sight LC is a document that guarantees payment for goods provided by an exporter to an importer. The document is issued by an intermediary, third-party bank and lists the precise conditions under which the payment will be made. The importer makes the payment when the exporter presents the sight LC along with other required documentation. There are three parties involved in a sight LC: the importer, exporter, and the issuing bank.

How does an LC at sight work?

The sight LC outlines specific criteria for the release of funds. This can involve procedural requests such as timely delivery and appropriate documentation including proof of shipping and other bills. Based on the successful completion of the requirements, the amount is payable to the beneficiary. The bank is given a certain period to complete the payment, usually five to ten working days.

The following is a general overview of how an LC at sight works:

How does a logistics aggregator work?

Logistics aggregators combine the services of multiple shipping providers into a unified, easily navigable platform.²Here is an overview of how it works:

Importer requests an estimate

Importer requests the issuance of an LC at sight

Importer's bank issues an LC at sight

Importer gets notified by exporter's bank

Exporter ships the goods

Importer's bank receives the LC at sight

Importer makes payment

Exporter receives payment

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

Step 1: Request for an estimate

The importer contacts an exporter to request an estimate for their goods and finalizes the transaction.

Step 2: Request for issuance of an LC at sight

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

Step 3: Issuance of LC at sight by bank

After examining the importer’s creditworthiness, the bank issues a sight LC 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

Once the exporter is satisfied with the LC, the goods are shipped. After shipping, the exporter submits the shipping paperwork to the bank.

Step 6: LC at sight 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 bank.

What is the need for an LC at sight?

A sight LC offers protection to both the importer and exporter in a transaction. Some of its benefits are:

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. This is beneficial for exporters because it reduces cash constraints due to delayed payments.

Short payment terms

Usually, a credit term given by an exporter lasts between 15 and 90 days. A sight LC ensures that the exporter is paid earlier rather than later.

Competitive edge for importers

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

Payment terms of LC at sight

A sight LC is issued to the exporter or beneficiary once the supporting financial institution receives the necessary paperwork. The payment is made after the issuing bank has verified shipping documents and other required documents submitted by the exporter. The necessary documentation can include proof of shipment, bill of lading, and packing bill. Sight LCs safeguard all parties involved in the transaction and mitigate some risks associated with overseas transactions. For instance, 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 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 a sight LC to avoid risk. All terms and conditions governing the trade agreement are accepted by the parties. Business A requests its bank to issue a sight LC to the exporter, business B, located in India. This LC includes the agreed-upon terms and conditions.

The importer’s bank issues the document and delivers it to the exporter’s bank in India. Business B then receives the LC from the bank and begins the production process after reviewing the paperwork. When the goods are ready, business B 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 from business A to obtain these documents. Without paying the amount as per the sight LC, business A cannot receive the goods that business B has delivered. The importer’s bank transfers the funds to the exporter’s bank after the importer pays the amount and receives the necessary paperwork.

Contents of LC at Sight

Some of the details included in a sight LC are:

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 official⁶

Difference between LC at Sight and Usance LC

Sight LC

Time letter of credit

Payment terms

Guarantees that the exporter is paid immediately upon presenting proof of shipment and required documents.

Allows buyers to pay the exporter at a later date, usually within a credit period of 30, 60, 90, or 180 days.

Due date

Due as soon as the bank has verified proof of shipment and other documents.

Due on a specified future date once proof of delivery and required documents are presented.

Benefits

Beneficial for exporters looking for immediate payment.

Beneficial for importers as the payment period is deferred.⁸

Difference between LC at sight and time LC

A usance LC is also called a deferred payment LC or a time LC. With time LCs, a certain number of days need to pass after submitting the letter, proof of delivery, and other required documents before the payment becomes due. Refer to the above table for more details on the differences between sight LCs and time LCs.

Conclusion

A sight LC can be an empowering tool for sellers looking to ship internationally, as it guarantees payment upon receipt of the letter and other documentation. This can reduce cash constraints for exporters and enable them to manage their working capital effectively. With e-commerce exports, reaching international customers and receiving payments is easy and simple. Indian businesses interested in starting their exports journey can leverage the tools and services offered by e-commerce export programs like Amazon Global Selling.

Amazon Global Selling: Easy e-commerce exports and hassle-free shipping

If you are a business owner and you want to sell your products to the world, Amazon Global Selling enables you to list and sell ‘Made in India’ products on 18 Amazon global marketplaces. As an e-commerce export program, Amazon Global Selling provides support and guidance at every step of your export journey, connecting you to Amazon’s Service Provider Network for tailored compliance, payments, and logistics support.

Registered sellers can choose to ship their products by themselves through Merchant Fulfilled Network (MFN) or they can opt for fulfilment by Amazon (FBA) and outsource order fulfilment to Amazon including packing, storage, delivery, and returns. Amazon Global Selling simplifies the process of international shipping to the world, helping businesses navigate customs and reach a vast audience.

More blogs on Letter of Credit

1. What is a Letter of Credit?

2. What is a Transferable Letter of Credit?

3. Irrevocable Letter of Credit: Meaning, process and benefits

4. Green Clause Letter of Credit: Definition, example and features

5. Documentary Letter of Credit: Overview and working

6. Revocable Letter of Credit: Everything you need to know about its uses

7. Red Clause Letter of Credit: Meaning, example and types

8. Standby Letter of Credit (SBLC): Overview, process and types

9. Usance Letter of Credit: Overview, meaning and process

10. Revolving Letter of Credit: Overview, meaning and process

11. Back to Back Letter of Credit: Overview, meaning and process

Frequently Asked Questions

1. Where is a 90-day sight term in an LC?

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.

2. Can an LC at sight be negotiated?

Yes, a sight LC is negotiable.

3. What are the benefits of an LC at sight?

A sight LC offers benefits like effective working capital management for exporters, early payment benefits for the exporter, and a competitive advantage for the importer.

4. What is a LC 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, a usance LC or sight LC is issued to the exporter.

5. What is a usance LC payable at sight?

A usance LC 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 that provides financing to the importer.

Published on December 29, 2022.

Sources:
1. https://www.investopedia.com/terms/s/sightletterofcredit.asp
2. https://www.dripcapital.com/en-in/resources/finance-guides/sight-lc-letter-of-credit
3. https://www.tradefinanceglobal.com/letters-of-credit/sight-lcs/
4. https://www.dripcapital.com/en-in/resources/finance-guides/sight-lc-letter-of-credit
5. https://www.dripcapital.com/en-in/resources/finance-guides/sight-lc-letter-of-credit
6. https://expresstradefinance.com/sight-lc-vs-usance-lc-what-when-why-and-which-one-to-choose-in-trade-finance/

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