Why letter of credit (LC) matters to a first-time founder
It reduces payment risk when buyer and seller do not know each other or operate across borders. The bank pays against compliant documents, not against its own inspection of the goods. Founders must budget for fees and follow every documentary condition precisely, because small discrepancies can delay or prevent payment.
Examples of letter of credit (LC)
A UK importer orders £80,000 of equipment from a supplier abroad. Its bank issues an irrevocable letter of credit requiring an invoice, transport document and inspection certificate. The supplier ships the equipment and presents matching documents before the deadline, so the nominated bank processes payment under the credit’s terms.
Common misunderstanding
It is not an unconditional bank guarantee that the goods are satisfactory. Banks generally examine documents rather than the physical shipment. A letter of guarantee usually supports payment after a specified default or failure, while a documentary credit is the primary payment mechanism when compliant documents are presented.
When to use it
Consider one for a large import or export order where counterparty, country or payment risk justifies the cost. Agree the required documents and deadlines before shipment, and use experienced banking and freight advisers. For trusted customers making small repeat orders, simpler payment terms may be cheaper and faster.