Letter of Credit (L/C) Operation Process and Risk Prevention Practice

Letter of credit is one of the most commonly used payment methods in international trade, replacing commercial credit with bank credit. However, it is complex to operate with strict document requirements and must be handled carefully.

1. L/C Types

Common types: sight L/C (payment at sight after beneficiary presents documents), usance L/C (payment at maturity after acceptance, e.g., 30/60/90 days), revocable/irrevocable L/C (default irrevocable under UCP600), confirmed L/C (confirmed by another bank, dual payment guarantee), transferable L/C (intermediary transfers L/C to actual supplier), back-to-back L/C. Exporters should prioritize irrevocable confirmed sight L/C.

2. Operation Process

① Importer applies to issuing bank for L/C; ② issuing bank opens L/C and advises to exporter's bank; ③ advising bank notifies beneficiary (exporter) of L/C; ④ exporter reviews L/C terms, prepares goods and ships; ⑤ exporter prepares full documents and presents to negotiating bank; ⑥ negotiating bank reviews documents and sends to issuing bank; ⑦ issuing bank pays/accepts after document review; ⑧ importer pays to redeem documents and take delivery.

3. Document Compliance Essentials

The core of L/C business is "documents consistent with each other, documents consistent with credit." Commonly required documents: commercial invoice, packing list, bill of lading, insurance policy (under CIF), certificate of origin, inspection certificate, etc. Product description, quantity, amount, shipping marks, and transport information in documents must exactly match L/C terms. Any discrepancy may lead to issuing bank refusal.

4. Common Risks and Prevention

Common risks: soft clauses (conditions in L/C beyond seller's control, e.g., "requires buyer's representative inspection signature"), poor issuing bank creditworthiness, unconfirmed L/C amendments, document discrepancies leading to refusal, usance L/C non-payment at maturity. Prevention: strictly review L/C terms upon receipt, reject soft clauses; choose creditworthy issuing banks or request confirmation; carefully review documents before presentation to ensure no discrepancies; usance L/C may consider discounting or forfaiting financing.