Resources - Letter of Credit (L/C) in China

Letter of Credit (L/C) in China

(Learn about Letter of Credit, a method of payment commonly used in China)

Among many other ways of paying for your order made in China, Letter of Credit enjoys a very good reputation and is considered as a safe and useful way to transfer money. In spite of being useful only in the case of large orders (above $30 thousand), Letter of Credit still has some limitations and related dangers, so if you decide to use it, you should be sure that your choice has reasonable grounds.

 

The letter of credit is a written document, which bonds three parties: the buyer, the seller and the bank. It defines the quantity, quality, delivery time and other provisions regarding the purchased goods. As soon the defined conditions are met by the seller, the bank pays the whole amount of money (which was previously deposited by the buyer). In theory, the L/C protects the interests of both parties: the seller is sure that the money is deposited in the bank, the buyer can require the quality of goods to be checked by an independent third party agency (in L/C agreement he may specifically define what kind of documents/reports/certificates shall be delivered – usually, Bill of Lading and Commercial Invoice are among these necessary documents, but various quality reports can also be submitted). This kind of services is usually more expensive than the telegraphic transfer (T/T), so it is applicable only in the case of big orders.

There are two types of letter of credit: irrevocable letter of credit and revocable letter of credit. The former means that the payment cannot be cancelled, the seller is assured that payment will be done as soon as he meets specified conditions. On the contrary, revocable letter of credit can be revoked, in another words cancelled. In 99% of the cases, it is irrevocable letter of credit that is being used in international trade.

Chinese companies are rather reluctant to accept the letter of credit, which is caused by their ways of operation. In most cases, western importers deal with some middle-sized companies, and these companies use the down payment money to cover the expenses related with proceeding your order. But you are an exporter, Chinese companies might be eager to buy your goods on a basis of letter of credit. What should be taken into consideration in this case?

The biggest danger related with letter of credit is that bank may withhold the payment if the "discrepancy" is found. What constitutes a discrepancy? In some cases, wrong serial number of a particular product. In other case, some small typos. If you have come across the dishonest business partner, he may point out these discrepancies after receiving normal quality merchandise. Even if the discrepancies can be explained, you will have to pay the additional discrepancy fees. Therefore, if you decide for Letter of Credit, be sure that someone responsible is doing all of the related paperwork.

Many banks in China can offer Letter of Credit services, but you should stick to the biggest and most reliable ones, including Bank of China or Industrial and Commercial Bank of China.

Read about methods of transferring money to China