Import letters of credit: protect the supplier while controlling when the bank pays

An import letter of credit is a bank undertaking issued at the buyer's request in favour of the overseas supplier. The supplier gains stronger payment security if it presents compliant documents, while the importer can make payment conditional on documentary evidence such as shipment and insurance papers.

The importer asks its bank to issue the credit

The buyer agrees commercial terms with the supplier, then asks its bank to issue a documentary credit in the supplier's favour. The issuing bank assesses the importer and can require a credit line, cash margin or security.

The importer should arrange the facility before promising a letter of credit in the sales contract. Bank approval can take time, especially for new countries or large values.

Translate the commercial contract into documentary conditions

The credit can require a commercial invoice, transport document, insurance certificate, packing list, certificate of origin or other evidence.

Keep conditions objective. Asking for documents that are difficult or impossible for the supplier to obtain can delay shipment and create discrepancy fees.

The bank examines documents rather than the physical goods

Under UCP 600 practice, banks deal with documents. They do not inspect whether the machinery actually works or whether goods meet every commercial expectation.

The importer still needs quality inspection and contract remedies. A compliant document presentation can trigger bank payment even while a later commercial dispute develops.

Decide whether to waive supplier document discrepancies

If the presenting bank identifies discrepancies, the importer can be asked whether it accepts them. Review the commercial consequence before waiving.

A minor spelling issue can be low risk; a late shipment or missing inspection certificate can be material. Procurement and finance should decide together rather than treating every discrepancy as a bank administration problem.

Include issuance, amendment, confirmation and financing fees

The issuing bank can charge setup and amendment fees. The supplier can also ask for confirmation by another bank, with the cost allocated under the contract.

Compare the all-in trade-finance cost with open account or advance payment. Letters of credit make the most sense where transaction risk justifies the extra banking work.

Plan when the issuing bank will debit or finance the importer

Depending on whether the credit is sight or usance, the importer may pay when compliant documents are presented or at a later maturity. The bank can fund the payment under a trade loan where agreed.

Keep LC expiry, shipment date and expected debit in the treasury calendar. A documentary credit should improve payment certainty, not create a surprise multi-million-pound bank debit.

Worked example: a UK importer buys machinery for €2 million and agrees 20 percent advance, 70 percent under a sight letter of credit against shipping documents and 10 percent after installation. The LC secures the 70 percent shipment payment, but the importer still needs separate controls over the advance and final acceptance. One trade-finance instrument rarely covers every commercial risk in the contract.

Review amendment requests commercially before approving them. A supplier asking to extend shipment by 30 days may be reasonable, but the extension can affect production plans, inventory financing and the credit expiry. Procurement, operations and treasury should agree before the bank is instructed to amend.

Keep unused LC capacity visible in the company's bank facility register. An issued credit can consume borrowing headroom even before cash is debited. Management should therefore consider letters of credit when assessing available credit for overdrafts, guarantees or other trade facilities.

Review whether the supplier asks for confirmation by a second bank. Confirmation can protect the exporter from issuing-bank or country risk but normally adds cost that the commercial contract should allocate. The importer should understand the fee before agreeing that all confirmation charges are for its account.

At document arrival, link the LC presentation to inventory and customs planning. Goods can reach port while documents remain under bank examination, creating demurrage or storage cost. Trade finance, logistics and procurement should therefore monitor the same shipment timeline.

Check whether the LC is irrevocable and subject to the expected ICC rules. Most modern documentary credits are irrevocable, but the importer should still verify the wording rather than rely on assumption. Trade-finance advisers should review unusual clauses before issuance.

When the supplier requests an amendment, account for bank fees and extended credit exposure. An extra 60 days of shipment time can also keep the issuing bank's facility tied up longer, reducing capacity for other imports or guarantees.

Use an LC register showing amount, currency, issuing bank facility usage, shipment date, expiry, presentation status and expected debit. This makes contingent exposure visible alongside guarantees and ordinary borrowing and helps treasury know when credit capacity will be released.