A Letter of Credit (LC) is one of the safest payment methods in international trade and a key financing tool for importers, especially on large deals with new suppliers. In this guide from MESAMA, we explain what a letter of credit is, how it works, and when to use one when importing from China.
What is a letter of credit?
A Letter of Credit (LC) is an undertaking by the importer's bank to pay the supplier the value of the goods, on the condition that the supplier presents the agreed, conforming documents (such as the bill of lading and the commercial invoice). In other words, the bank guarantees both parties.
How does it protect both sides?
| Party | Protection |
|---|---|
| Importer | The supplier is paid only after shipment is proven by documents |
| Supplier | Payment is guaranteed by the bank once the terms are met |
How a letter of credit works, step by step
- Agree on the terms with the supplier and specify the LC in the contract.
- The importer asks their bank to open a letter of credit.
- The supplier's bank is notified of the letter of credit.
- The supplier ships the goods and submits the shipping documents.
- The bank checks that the documents conform and releases payment.
Types of letters of credit
- Revocable / irrevocable: the irrevocable LC is the safe and common option.
- Confirmed: a second bank adds its own guarantee.
- Deferred payment: gives the importer a grace period to settle.
When should you use a letter of credit?
- On large, high-value deals.
- With a new supplier you haven't built trust with yet.
- When you want bank-backed protection for both parties.
For small orders, a bank transfer from your company's official account may be enough, combined with proper supplier verification.
MESAMA's tip
A letter of credit is a powerful tool, but it demands precision in the paperwork — a single error can delay payment. At MESAMA, we help you structure your deals and choose the payment method that fits best. Get in touch, or read how to protect yourself from import fraud.