A Letter of Credit is a bank-mediated payment instrument. The buyer’s bank issues the L/C in favour of the seller. The seller ships the cargo and presents the shipping documents (B/L, commercial invoice, packing list, COA, inspection certificate, certificate of origin) to their bank. The seller’s bank verifies the documents against the L/C terms; if compliant, payment is released to the seller. If not compliant, the documents go back to the seller for correction or to the buyer for waiver. The buyer’s bank pays the seller’s bank; the buyer reimburses their own bank.
L/C at sight vs deferred L/C
L/C at sight is the standard form: payment released as soon as compliant documents are presented. The seller is paid before the cargo arrives at the destination port.
Deferred L/C (also called usance L/C) defers payment by a specified period after document presentation, commonly 30, 60, 90, or 180 days. The seller bears the financing cost of the deferral, which is reflected in the contract price. Common in larger orders where the buyer needs cash-flow alignment with downstream sales.
For most Chinese chemical exports to first-time or high-value buyers, L/C at sight is the form to use. Deferred L/C only makes sense where the buyer’s working capital constraints justify the price premium the seller will charge.
Why use L/C instead of T/T
Three reasons:
- Eliminates deposit-fraud risk. Under T/T, the buyer’s deposit is wired to the factory directly and the protection is the factory’s reputation. Under L/C, no money moves until shipping documents prove the cargo actually loaded.
- Buyer’s market or company policy. Some buyer organisations (large industrial buyers, government procurement) require L/C as a matter of policy for any new supplier or any order above an internal threshold.
- Working capital alignment. Deferred L/C lets the buyer match payment timing to cash flow from downstream resale. T/T cannot do this.
The documentary discrepancy trap
L/C protection comes from the bank’s strict reading of the document set. Banks check every line of every document against every line of the L/C terms, and any discrepancy is grounds for non-payment, even when the underlying cargo is fine. Common discrepancies that bank document examiners flag:
- Spelling or typo on the commercial invoice that does not match the L/C beneficiary name exactly
- Vessel name on the B/L that differs from any vessel name pre-named in the L/C (use “vessel TBD” wording in the L/C if vessel is not pre-fixed)
- Quantity short by even small percentages without an explicit tolerance clause in the L/C
- Late presentation, documents presented after the L/C expiry or after the latest shipment date
A discrepancy does not mean payment is refused, it means the buyer must explicitly waive the discrepancy before payment is released. Buyers usually waive, but the process introduces delay and gives the buyer leverage to renegotiate the spec or price after shipment. Avoid by drafting clean L/C terms upfront.
Cost
Bank fees for an L/C at sight typically run 1 to 2 percent of the L/C value, split between the issuing bank (buyer side) and the advising/confirming bank (seller side). On a USD 100,000 order, that is USD 1,000 to USD 2,000 in fees. For a deferred L/C, the seller will charge an additional 0.5 to 1.5 percent per 30 days of deferral to cover financing, so a 90-day deferred L/C can cost the buyer 4 percent of the order value in combined fees and price premium.
Practical sourcing notes
For first orders above USD 80,000 with new factories where the relationship has not been tested, we recommend L/C at sight. The fee is meaningful but the protection is real. For repeat orders or smaller first orders, T/T at 30/70 with inspection-conditional balance is faster and cheaper. The choice is order-specific, not policy.
Related terms
T/T is the alternative payment method. BOL is the central shipping document under L/C presentation. Commercial Invoice and Proforma Invoice both feature in the L/C document set.