A letter of credit, or LC, is a popular trade finance mechanism used to settle international trade transactions. It is by far the safest for both importers and exporters. However, an LC is somewhat more complex than other methods and this can result in many Chinese businesses being reluctant to agree to LC payment terms.
Protections for the Importer and Exporter
It is a regular practice for Chinese companies to ask for a 30% deposit as an advance. However, it is not uncommon for this “deposit” to then become a non-refundable “down payment” if things do not go as planned. This major risk is entirely mitigated when using an LC.
For the exporter, the LC serves as a guaranteed payment once the shipment has been successfully consigned. Furthermore, the LC can be used to obtain credit, if the exporter’s bank is willing. Thus, from the exporter’s perspective, it is possible for them to obtain the necessary “working capital advance” while also being guaranteed payment.
Still, Many Chinese Businesses are Reluctant
When trading with China, you will encounter much reluctance to agree to LC payment terms. This is for multiple reasons. Many Chinese businesses are small “survival” businesses working from one order to the next. Thus, they are often turned down by banks when seeking credit, even if they have an LC. It is also significantly more hassle for them to obtain credit against an LC when compared with obtaining an advance payment from the importer. Furthermore, many smaller companies often do not have the experience required to accept an LC.
Still, for the best chances of getting your order accepted under LC payment terms, it is important to communicate this early on. If you make it clear that you will only agree to LC terms, then you are likely to more quickly find an exporter who is willing to accept this.
A Note on Nitty Gritty
Both importers and exporters must pay attention to the details of the LC. An LC’s strength and reliability lie less in its nature and more in how well it is structured and what details are included.
The importer should ask not just for the shipping documents but also for quality inspection reports, compliance tests, and or product certificates, as necessary; to make sure the goods shipped are to specification. On the exporter’s side, they must pay due diligence to all the terms they are agreeing to, otherwise unscrupulous players can rely on “discrepancies” to withhold payments.
Importance of Choosing an International Export/Import Bank
Whether you are an exporter or importer, choosing to work with a reputed, experienced international trade finance provider, such as Euro Exim Bank, will ensure that your LCs are well laid out and ironclad. For exporters, banks like this can also provide much easier access to trade financing, both against an LC and in other forms, such as factoring.