Letter of Credit (L/C)

A Letter of Credit (L/C or LC) is a bank-guaranteed payment mechanism used in international trade. The buyer's bank (the "issuing bank") provides a written guarantee to the seller that payment will be made upon presentation of specified documents proving the goods have been shipped according to the agreed terms. This eliminates the need for the buyer and seller to trust each other directly -- the bank intermediates the transaction.

The L/C process works as follows: the buyer applies for an L/C at their bank, specifying the transaction terms (product description, quantity, price, shipping terms, required documents, latest shipment date). The issuing bank sends the L/C to the seller's bank (the "advising bank"). The seller ships the goods and presents the required documents (typically B/L, commercial invoice, packing list, certificate of origin, inspection certificate) to their bank. The advising bank reviews the documents and, if compliant, forwards them to the issuing bank for payment.

For DTC importers, L/Cs are less common than wire transfers due to their complexity and cost (bank fees typically run 1-3% of the transaction value plus fixed charges). L/Cs make sense for large orders with new or unverified suppliers, transactions where trust has not been established, and situations where either party needs the security of a bank guarantee. For orders under $50,000 with established suppliers, most importers use simpler payment methods like wire transfer with a 30/70 deposit/balance split.