A letter of credit (LC) is the most widely used payment instrument in international trade — a bank-backed guarantee that protects both buyer and seller across borders, currencies, and legal systems. In the UAE, one of the world's most active trade hubs, LCs underpin billions of dirhams of import and export transactions annually. Yet many UAE businesses — particularly those new to structured trade finance — find the LC process opaque, slow, or expensive. This guide explains how letters of credit work under UCP 600, the types of LC available through UAE banks, what they cost, and how to use them strategically.
A letter of credit is a formal undertaking issued by a bank (the issuing bank, representing the buyer) to pay a specified amount to a beneficiary (the seller) provided that the beneficiary presents the documents specified in the LC within the specified timeframe. The payment obligation is independent of the underlying trade contract — the bank pays if the documents comply, regardless of any dispute between buyer and seller about the goods.
This independence is the LC's core value: it converts the buyer's creditworthiness risk (will the buyer pay?) into bank credit risk (will the issuing bank honour its commitment?). For exporters, this is far more reliable than an open-account trade where payment depends entirely on the buyer's willingness and ability to pay.
Payment is made immediately upon presentation of compliant documents. Used where the exporter requires immediate liquidity and the buyer is willing to pay upfront against shipping documents. Common in commodity and energy trades.
Payment is deferred for a specified period after document presentation — a defined usance period. Effectively provides the buyer with credit. The exporter can discount the usance LC to receive early payment (see LC Discounting).
Reinstates automatically after each drawing, avoiding the need to open a new LC for each shipment in a recurring trade relationship. Efficient for importers making regular purchases from the same supplier.
Allows the first beneficiary (typically a trader or broker) to transfer the LC — in whole or in part — to a second beneficiary (the actual manufacturer or supplier). Used extensively in UAE trading and re-export business where an intermediary sits between buyer and supplier.
A new LC opened by a trader using a received LC as collateral. The trader uses the master LC from the buyer as security to open a second LC to their supplier. Common in UAE commodity trading and re-export corridors.
A guarantee instrument rather than a primary payment mechanism — the SBLC is drawn only if the buyer fails to pay. Used as a performance or payment guarantee in long-term supply contracts. See the separate SBLC article for full detail.
Total LC costs for a standard import LC are typically a modest percentage of the transaction value, making them competitive against the credit risk they eliminate.
A large share of first presentations contain at least one discrepancy. The most common in UAE trade:
A: Yes — many UAE banks offer cash-margined LCs where the buyer deposits the full LC value (or a set percentage) as cash collateral. This is common for new importers without an established trade finance facility. The drawback is the cash tied up during the LC period. Businesses that trade regularly are better served by applying for a revolving trade finance facility.
A: An advised LC means the advising bank in the seller's country has verified the LC's authenticity but has not added its own payment undertaking — the seller still relies solely on the issuing bank's commitment. A confirmed LC means the confirming bank in the seller's country has added its own independent payment obligation. Confirmation is valuable when the issuing bank or country carries significant risk — common in trades from high-risk jurisdictions where UAE buyers need to provide additional comfort to their suppliers.
A: UAE banks assess trade finance facility applications based on the company's trading history, financial statements (2–3 years), existing banking relationships, collateral (property, fixed deposits), and trade flow documentation (purchase orders, contracts, sales history). Synergy Consulting helps UAE businesses prepare and present trade finance applications to banks — structuring the facility request to match the specific trade flows and presenting financials in the format banks require. Contact us for a confidential assessment.
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