Silk Bridge Journal

Definition

 A Letter of Credit (L/C) is a payment instrument in which the importer’s bank undertakes to make payment to the exporter once the exporter presents documents that comply with the conditions specified in the letter of credit. These documents may include the Bill of Lading, Commercial Invoice, Packing List, or documents confirming the origin of the goods.

A letter of credit separates payment from direct trust between the importer and the manufacturer. The bank makes the payment based on whether the presented documents comply with the terms of the letter of credit, rather than simply on the fact that the goods have been shipped.

Why Should Importers Know This?

 A Letter of Credit can significantly increase transaction security, particularly in the case of large orders, high-value contracts, or when starting cooperation with a new supplier. The exporter receives greater assurance of payment, while the importer can make payment conditional upon the presentation of specific documents and fulfillment of previously agreed conditions.

At the same time, a letter of credit is more complicated and costly than a standard TT bank transfer. It requires very precise preparation of the terms and documentation, as even minor discrepancies in the documents may result in delayed payment or refusal of payment.

Related Terms

 TT · Proforma Invoice · Bill of Lading · Commercial Invoice · Packing List · Deposit · Due Diligence

In Practice

For larger orders, an importer may agree with the manufacturer to make payment through a Letter of Credit. The L/C terms should be prepared very carefully, as even a minor discrepancy in the documents may result in a payment delay. Before using this solution, it is also worth comparing the costs and procedures with a traditional TT bank transfer.