What is a Letter of Credit? Do I Need One?

Letters of credit are sometimes a necessary part of a shipping transaction.  In simple terms, banks need a guarantee of payment, and a letter of credit is a method of guaranteeing that a shipper will get paid and that the purchaser will actually get the shipment.  In reality, though, there are pitfalls and caveats when it comes to letters of credit.  Here is what you need to know.

First, a letter of credit is not really a guarantee that payment will be made and the shipment will be done properly.  It is the a good method, but not flawless.  Other considerations are to make oneself aware of the full charges the bank will levy (or could charge) and add those costs against the purchase price to cover against possible loss.  Many a first-time shipper has found that profits are quickly eaten up because the bank charges more than they expected in fees.

In some disaster scenarios, the wording on the letter of credit has made it nearly impossible for the shipper to get paid, or because the term “irrevocable confirmed” wasn’t used, then the letter of credit is thrown out.  Even with the proper stamps and signatures, that isn’t a full guarantee; after all, it isn’t as though the certifying agencies actually open a box to ensure that what is in the box works, is the right color, etc.

It is important to work with a logistics expert when it comes to shipping and getting a letter of credit.  It can cost a lot of time and surprising amount of money to do it yourself.  The letters have to be worded correctly, the proper documentation has to be presented, and then you can expect to get paid – on the bank’s timeline.  Using an expert means getting to take advantage of a great deal of experience you may not be able to tap into yourself!