Letters of credit explained for first-time importers

You are buying from a company in another country that you have never met. They want to be paid before they ship. You want the goods before you pay. A letter of credit is the instrument that resolves that standoff, and it has done so for a very long time.

How it works

1. 1You and the supplier agree the terms of the trade in a contract.
2. 2You ask your bank to issue a letter of credit in the supplier's favour. Your bank is now committed to pay, provided certain conditions are met.
3. 3The supplier ships the goods and presents the required documents to their bank.
4. 4If the documents match what the credit demands, exactly, payment is released.
5. 5The documents come to you, and you use them to take delivery of the goods.

The crucial thing to understand is what the bank is checking. It is not checking your goods. It is checking your documents. Banks deal in paper, not in cargo.

Where it goes wrong

Most letter of credit problems are documentary discrepancies. A date out of sequence, a description that does not match the credit word for word, a missing signature, a certificate presented after the deadline. Each one gives the bank grounds to refuse the presentation, and each one costs time and fees to correct.

• Descriptions on every document must match the credit and each other
• Shipment and presentation deadlines are absolute, not indicative
• Named documents must be exactly the documents presented
• Partial shipment and transhipment must be permitted if they are going to happen
• The credit must reflect the reality of the route and the goods, not a template

When a letter of credit is the wrong tool

It is not free and it is not fast. Bank charges on both sides, plus the time to issue and amend, make it disproportionate for a small trial order. For a modest first shipment from a supplier you are testing, a telegraphic transfer with a sensible split between deposit and balance against inspection is often more practical.

The instrument should match the size and the risk of the trade. For a first container of moderate value, a documentary collection sits usefully between the two: more protection than an open transfer, less cost and ceremony than a full credit.

Before you start

• Talk to your bank early. What they will issue and on what terms shapes the whole deal.
• Get the contract registered and the import documentation in order before goods move.
• Agree the exact document list with the supplier in advance, and check a draft against the credit.
• Build inspection into the process, so that compliant documents also mean correct goods.

We work only through lawful, documented banking channels, and where a proposed payment route is not one, we say so before the order is placed rather than after your money has moved.