What Is a Letter of Credit (LC)?
A Letter of Credit (LC) is a bank guarantee that ensures a seller receives payment once they meet specified conditions. It's the safest payment method for international trade, especially when dealing with new suppliers in China.
How Does an LC Work in China Trade?
- Buyer and seller agree on terms and sign a contract
- Buyer applies for an LC at their bank
- Issue bank sends LC to seller's bank in China
- Seller ships goods and presents documents (B/L, invoice, packing list, CO)
- Seller's bank verifies documents and releases payment
- Buyer's bank debits buyer's account and forwards documents
- Buyer uses documents to claim goods at port
Types of Letters of Credit
Revocable LC: Can be changed or cancelled by the issuing bank anytime (rarely used)
Irrevocable LC: Cannot be cancelled without all parties' consent (standard in China trade)
Confirmed LC: A second bank adds its guarantee (recommended for first-time trades)
Transferable LC: Allows the beneficiary to transfer credit to another party (useful when trading companies are involved)
Revolving LC: Automatically renews for multiple shipments (ideal for ongoing relationships)
LC vs TT Payment: Which Is Better?
| Factor | LC | TT (Telegraphic Transfer) |
|---|---|---|
| Upfront cost | 0.5-2% of LC value | $20-50 per transfer |
| Buyer risk | Low (pay only if docs comply) | High (30% deposit at risk) |
| Seller risk | Low (payment guaranteed if docs comply) | Low (payment before shipment) |
| Processing time | 5-10 business days | 1-2 business days |
| Best for | New suppliers, large orders | Established relationships |
LC Costs in China Trade
Typical LC costs include: opening fee (0.125-0.5%), advising fee ($50-200), confirmation fee (0.5-2% if confirmed), amendment fee ($50-150), and negotiation fee (0.1-0.25%).
CSMG Supply Chain: LC Credit Sales
We offer LC credit sales — qualified buyers can import without opening an LC themselves. Pay after goods arrive, on flexible 30-90 day terms. Learn more →