LC (Letter of Credit)

A Letter of Credit (LC) provides the strongest payment security available in international textile trade, using banks as trusted intermediaries between buyers and sellers who may have no prior relationship. The buyer's bank issues the LC, essentially promising to pay the seller once shipping documents prove the goods were dispatched as agreed.

The mechanism works through documents rather than goods inspection. The seller ships the fabric, then presents a complete document set to their bank: commercial invoice, packing list, bill of lading, certificate of origin, and any other documents the LC specifies. The bank examines these documents against the LC terms. If everything matches exactly, payment releases to the seller. The buyer receives the documents, which they need to claim the goods at destination.

This document-based system protects both parties. Sellers gain assurance that a creditworthy bank—not just an unknown foreign buyer—stands behind the payment. Buyers know their funds release only when documents prove shipment occurred according to contract terms. Neither party needs to trust the other; they trust the banking system.

Several LC variations serve different needs. Irrevocable LCs (the standard form) cannot be modified without all parties' consent. Confirmed LCs add a second bank's guarantee, useful when the issuing bank's creditworthiness is uncertain. At-sight LCs pay immediately upon document presentation, while usance LCs defer payment for 30, 60, or 90 days—effectively providing trade financing.

The cost and complexity of LCs—bank fees typically run 0.5-2% of the LC value, and document preparation demands precision—make them most worthwhile for first-time trading relationships, large orders, or transactions involving higher-risk markets. As trust develops between trading partners, many shift to simpler payment terms like T/T (telegraphic transfer) with deposits.

The most common pitfall is document discrepancies. Banks reject documents for surprisingly minor issues: a misspelled company name, quantities that don't match exactly, or missing clauses the LC required. Sellers must review LC terms carefully before shipping and prepare documents with meticulous attention to detail.