Getting an overseas buyer is one challenge. Getting paid after shipping the goods is another.
For Nigerian exporters, a Letter of Credit can reduce payment risk by replacing the buyer’s promise to pay with a bank’s undertaking to pay, provided the exporter presents the documents required by the credit correctly and on time.
But a Letter of Credit is not an automatic guarantee of payment. Banks examine documents, not the physical goods. A wrong date, inconsistent product description or missing certificate can delay payment even when the cargo has already arrived at its destination.
This guide explains how Letters of Credit work, the Nigerian requirements that sit alongside them, and what exporters should check before shipping.
What Is a Letter of Credit?
A Letter of Credit, commonly called an LC or documentary credit, is an undertaking issued by a bank on behalf of a buyer.
The bank agrees to pay the exporter if the exporter presents the documents specified in the LC and those documents comply with its terms.
The basic parties usually include:
- Applicant: The overseas buyer
- Issuing bank: The buyer’s bank
- Beneficiary: The Nigerian exporter
- Advising bank: The bank that authenticates and advises the LC to the exporter
- Confirming bank: A bank that may add its own payment undertaking
A useful Nigerian overview of Letters of Credit also explains the independence of the LC from the underlying sales contract.
This means a dispute over the goods does not automatically cancel a bank’s obligation where a complying documentary presentation has been made.
Banks Deal in Documents, Not Goods
This is one of the most important rules exporters need to understand.
The bank does not go to the port to inspect your cashew, cocoa, textiles or processed food.
It examines the documents you submit.
If the LC asks for:
- Commercial invoice
- Packing list
- Clean on-board Bill of Lading
- Certificate of Origin
- Inspection certificate
- Insurance document
then those documents must comply with the requirements stated in the credit.
Even if the physical shipment is completely correct, discrepancies in the paperwork can delay or prevent payment.
International documentary credits commonly operate under the ICC’s UCP 600 rules. A practical explanation of UCP 600 rules helps explain how banks examine documents and handle documentary compliance.
How LC Payment Works for a Nigerian Exporter
A typical export LC transaction works like this.
1. You Sign the Sales Contract
The Nigerian exporter and foreign buyer agree on:
- Product
- Quantity
- Price
- Currency
- Incoterm
- Shipment deadline
- Required documents
- Payment by Letter of Credit
The contract should state the type of LC required.
2. The Buyer Requests the LC
The buyer asks its bank to issue the LC in favour of the Nigerian exporter.
The issuing bank sends the credit to a bank that will advise it to the exporter.
3. Your Bank Advises the LC
The Nigerian bank authenticates the credit and informs you that it has been received.
Banks such as FirstBank provide Letter of Credit services as part of their trade-finance operations.
Do not treat a PDF sent directly by a buyer as proof that a valid LC exists. The credit should be authenticated and advised through the banking system.
4. You Review the LC
Do this before producing or shipping the goods.
Check whether every condition can realistically be met.
If something is incorrect, request an amendment immediately.
5. Complete Nigerian Export Requirements
The LC does not replace Nigeria’s export procedures.
Depending on the transaction, exporters may still need:
- NEPC registration
- Form NXP
- NESS documentation
- Pre-shipment inspection
- Clean Certificate of Inspection
- Customs export declaration
- Product-specific certificates
The authorised dealer bank handling your export transaction also plays an important role in the NXP process.
For example, FirstBank provides information on Forms NXP and NCX used within Nigeria’s trade documentation framework.
6. Ship the Goods
Cargo must be shipped within the latest shipment date stated in the LC.
After shipment, collect the required transport and commercial documents.
7. Present the Documents
The complete documentary set is presented to the nominated, advising or confirming bank as required by the credit.
Under UCP 600, where transport documents are involved, presentation is generally required within the stated presentation period and before the credit expires.
8. The Bank Examines the Documents
Banks generally have up to five banking days under UCP 600 to determine whether a presentation complies.
If the documents comply, payment proceeds according to the LC terms.
If discrepancies exist, the bank may refuse the presentation or seek a waiver from the buyer.
Sight LC vs Usance LC
Not every Letter of Credit pays at the same time.
Sight Letter of Credit
A sight LC provides for payment after a complying presentation and completion of the banking process.
It is generally more attractive to exporters that want payment relatively quickly.
Usance Letter of Credit
A usance or deferred-payment LC pays after an agreed period.
For example:
- 30 days
- 60 days
- 90 days
- 180 days
The period may run from the Bill of Lading date, presentation date or another specified point.
This effectively gives the buyer credit.
An exporter accepting a usance LC should consider the effect on cash flow and whether the receivable can be discounted through a bank.
Confirmed vs Unconfirmed Letters of Credit
Confirmation is another important distinction.
With an unconfirmed LC, the Nigerian exporter principally relies on the issuing bank’s undertaking.
With a confirmed LC, another bank adds its own payment undertaking.
Confirmation can reduce exposure to risks involving the issuing bank or the buyer’s country.
It may be worth discussing where:
- The buyer is new
- The issuing bank is unfamiliar
- The shipment value is substantial
- The buyer’s country has foreign-exchange restrictions
- Political or banking risk is a concern
Confirmation comes at a cost, so exporters should establish who will pay the confirmation charges before agreeing to the transaction.
Nigeria’s Form NXP Requirements Still Apply
Being paid under an LC does not remove Nigerian foreign-exchange requirements.
The current CBN Forex Manual contains the framework governing exports, Form NXP and repatriation of export proceeds.
Form NXP generally connects the shipment with the authorised dealer bank and the export proceeds expected from the transaction.
Your LC should therefore align with your Nigerian export documentation.
Information such as the:
- Exporter
- Buyer
- Currency
- Product
- Value
- Shipment terms
should not contradict what has been declared through the formal export process.
For non-oil exports, the research supporting this guide identifies a 180-day repatriation window from the Bill of Lading date, while oil and gas exports have a shorter period. Exporters should confirm the current requirements with their authorised dealer bank before shipment.
Documents Commonly Required Under an LC
Every LC is different, but common documents include:
- Commercial invoice
- Packing list
- Bill of Lading or Air Waybill
- Certificate of Origin
- Insurance certificate
- Inspection certificate
- Weight or quality certificate
Nigeria-specific export documents may also be required separately or incorporated into the LC.
The golden rule is simple:
Do not agree to provide a document you cannot obtain.
Every additional certificate listed in the LC creates another potential discrepancy.
What to Check Before Accepting the LC
Review the following carefully.
Your Company Name
Your legal name should be accurate and consistent with the commercial and export documents.
LC Amount and Currency
Confirm that both match the sales contract.
Latest Shipment Date
Make sure you have enough time for production, inspection, documentation and port processes.
Expiry Date
There must be enough time after shipment to obtain and present the required documents.
Presentation Period
Check how many days you have after shipment to present the documents.
Product Description
The wording should be accurate without being unnecessarily complicated.
You need to reproduce it consistently on relevant documents.
Ports
Check the port of loading and discharge.
Required Documents
Review every document listed.
Ask:
- Who issues it?
- Can I obtain it before the deadline?
- Does it require the buyer’s involvement?
- Does it match Nigerian export requirements?
Bank Charges
Determine who pays:
- Advising charges
- Confirmation charges
- Courier costs
- Negotiation charges
- Discrepancy fees
These costs can reduce your export margin if they are unexpectedly allocated to the beneficiary.
Watch Out for Soft Clauses
A soft clause is a condition that makes payment depend on something the exporter cannot independently control.
For example, an LC may require a certificate that can only be signed by the buyer.
That gives the buyer an opportunity to prevent the exporter from making a complying presentation.
If an LC contains a condition you cannot control or satisfy independently, request an amendment before shipping.
Common LC Discrepancies
Typical problems include:
- Late shipment
- Late presentation
- Incorrect beneficiary name
- Invoice description differing from the LC
- Incorrect shipment quantity
- Wrong port
- Missing on-board notation
- Bill of Lading inconsistencies
- Incorrect insurance amount
- Missing certificates
- Conflicting dates across documents
Do not assume the bank will overlook a small mistake because it understands what you intended.
Banks examine documentary compliance.
Final Thoughts
Letters of Credit can provide Nigerian exporters with stronger payment protection than simply shipping goods and waiting for a foreign buyer to transfer money.
But the protection works only when the exporter understands the conditions.
Before shipping, confirm that the LC matches the sales contract, Nigerian export process and actual logistics arrangement.
Check the amount. Check the dates. Check the banks. Check the documents. Check the ports. Check who pays the charges.
Most importantly, request amendments before the cargo leaves Nigeria.
With Letters of Credit, successful payment begins long before the documents reach the bank.