How to Pay via Letter of Credit (LC)

You've negotiated a $50,000 order with a supplier in Shenzhen, and they've asked for a 30% deposit upfront. You've been burned before—a supplier took your deposit and delivered late, substandard goods. You want security, and the supplier wants assurance you'll pay. This is exactly when a Letter of Credit (LC) becomes your best tool. In this article, you'll learn exactly how to pay via Letter of Credit (LC)—from choosing the right type to getting your documents approved and avoiding the costly mistakes that delay shipments and tie up your cash.

What Is a Letter of Credit and How Does It Work?

A Letter of Credit is a bank-backed guarantee that you'll pay the supplier once they present the required documents proving they've shipped your goods. It's not a payment method like a wire transfer; it's a conditional payment commitment. Your bank (the issuing bank) promises to pay the supplier's bank (the advising or confirming bank) when the supplier meets every condition you set—shipping dates, product quality, and documentation.

Here's the flow in simple terms: You and the supplier agree on terms. You apply for an LC at your bank and specify the documents the supplier must provide (like a bill of lading, commercial invoice, and packing list). Your bank sends the LC to the supplier's bank. The supplier ships the goods and presents the documents to their bank. If everything matches the LC, the supplier gets paid. If not, you can reject the documents and the bank won't pay.

Why use an LC?

Types of Letters of Credit: Which One Do You Need?

Not all LCs are the same. Choosing the wrong type can cost you money or leave you exposed. Here are the four most common types you'll encounter when importing from China.

Irrevocable vs. Revocable LC

An irrevocable LC cannot be changed or cancelled without both parties' consent. This is the only type you should ever use. A revocable LC can be changed by the issuing bank without your consent—it offers no real security and is almost never used. Always specify 'irrevocable' in your LC application.

Confirmed vs. Unconfirmed LC

An unconfirmed LC is guaranteed only by your bank. If your bank is in a developing country, the supplier's bank might not trust it, and the supplier may refuse to ship. A confirmed LC adds a second bank (usually a major international bank like HSBC or Standard Chartered) that guarantees payment. This costs extra—typically 0.5%–1.5% of the LC amount—but it makes your LC acceptable to almost any supplier.

At Sight vs. Deferred Payment LC

An at-sight LC pays the supplier immediately when they present conforming documents. A deferred payment LC pays at a future date (e.g., 30, 60, or 90 days after shipment). Deferred LCs give you time to sell the goods before paying, but they require the supplier to trust you more—they'll often charge a higher price or require a confirmed LC.

Which type should you choose?

Step-by-Step Process to Pay via LC

Here's the exact process from negotiation to payment, with typical timelines and costs. Expect the entire process to take 2–4 weeks from applying for the LC to the supplier receiving payment.

Steps to execute an LC payment

Key documents you'll need to specify in the LC

Typical documents required in an LC

LC Costs: What You'll Actually Pay

LCs are not cheap, and many importers underestimate the total cost. Here's a realistic breakdown based on a $50,000 LC from an African bank to a Chinese supplier.

Typical LC costs (for a $50,000 LC)

Total upfront costs can easily reach $1,000–$2,000 for a $50,000 LC. That's 2–4% of the order value. Compare that to a wire transfer fee of $30–$50. Use an LC when the order size justifies the cost—typically above $10,000–$20,000—or when the supplier requires it.

Common Mistakes Importers Make with LCs

Even experienced importers make these errors. Here's how to avoid them.

Mistakes to avoid

LC vs. Other Payment Methods: A Quick Comparison

When deciding how to pay, you have four main options. Here's how they stack up for an importer in Africa or an emerging market.

Payment methods compared

Tips for a Smooth LC Transaction

The LC process is document-heavy, and the #1 reason for payment delays is discrepancies—small mismatches between the documents and the LC. Here's how to keep things moving.

Practical tips

Conclusion: Your Next Steps

A Letter of Credit is a powerful tool, but only if you use it correctly. The key takeaways: always use an irrevocable LC, consider a confirmed LC for new suppliers, specify clear documents including a third-party inspection, and budget for the costs (2–4% of order value). Don't treat an LC as a quality guarantee—it's a payment guarantee based on documents.

Now, take action: Before your next order, contact your bank's trade finance department and ask for an LC application form. Compare their fees with a couple of other banks. Then, when you negotiate with your supplier, you'll know exactly what to ask for—and you'll avoid the costly mistakes that sink many first-time importers.