Letter of credit for a China order: is it suitable?

Decide whether the paperwork is worthwhile

A documentary letter of credit is a bank undertaking to pay the supplier when its conditions are satisfied. Consider it when the supplier wants payment assurance and you want payment tied to specified documents. Compare it with staged payment using our supplier payment guide, which covers the broader choice of methods.

Before committing, ask your bank about the facility, cash cover or security, payment timing and charges for issuance, amendments and discrepancies. Ask the supplier whether its bank can handle the proposed credit. Decide who bears each charge and whether the administrative work is proportionate to the order.

Draft conditions that people can actually meet

Request a draft before issuance. Review it with the supplier, issuing bank, forwarder and proposed inspector. For each document, identify its issuer, required content, format and delivery route. Check the beneficiary name, currency, goods description, shipment arrangements, latest shipment date, presentation deadline and expiry. Ask the bank which documentary-credit rules the draft incorporates.

Avoid relying on phrases such as “acceptable quality”. Ask the bank how to express the intended inspection requirement through a named document, issuer and clear result. Share the proposed wording with the inspector before opening the credit. Use our inspection guide to plan the physical check separately.

Match transport-document conditions to the actual shipping and cargo-release arrangement. Ask the forwarder whether the requested document can be issued as drafted and how you will obtain the goods. Our bills of lading and cargo release guide explains that separate practical issue.

Handle changes through the bank

If production slips or the shipping plan changes, compare the revised plan with the credit immediately. Ask the issuing bank to arrange the necessary amendment and explain whose agreement is needed and when it takes effect. Do not treat an email agreement with the supplier as confirmation that the credit has changed.

Review connected conditions together. A later shipment may also call for a revised expiry, presentation arrangements or inspection wording. Agree amendment charges, obtain the bank's confirmation of the effective wording and give the current version to everyone preparing documents.

Review discrepancies before accepting them

A discrepancy is a mismatch between the presented documents and the credit's requirements. When the bank reports one, obtain the complete list and the affected documents. Check issues such as conflicting descriptions, missing inspection evidence, unsuitable transport documents or dates outside the agreed conditions. Ask the bank to explain the significance rather than assuming every typing difference blocks payment.

Ask whether correction and resubmission remain possible within the credit's deadlines. If the bank requests your agreement to waive a discrepancy, assess the underlying shipment before replying. A missing inspection report deserves a different commercial response from an address error. Ask whether your acceptance would lead to payment, what further bank approval is needed and what charges apply.

Record the precise discrepancies you agree to accept and your reasons. Check the inspection outcome, shipment position and cargo-release documents alongside the bank's request. Avoid a blanket approval merely because the supplier says the goods are waiting.

Keep bank checks separate from goods checks

The bank's documentary check is not a factory inspection. Correct documents can accompany disappointing goods, as the existing payment guide explains. Do not treat bank acceptance as evidence that the product matches the approved sample, performs properly or is suitable for your intended use.

Keep the specification, sample approval and physical inspection process alongside the credit. An inspection document is only as useful as the work behind it: agree what will be examined and what result the document should record. Cambridge China Bridge's staff in China can help coordinate factory checks and inspection evidence for discussion with your bank.