Letter of Credit (L/C): How It Works in China Trade
Quick Definition: A Letter of Credit (L/C) is a bank-guaranteed payment instrument. The buyer's bank guarantees payment to the seller's bank, but only when the seller provides compliant shipping documents proving the goods were shipped as agreed.
How L/C Works
- Buyer and seller agree on L/C payment terms in their contract.
- Buyer applies to their bank (issuing bank) to open an L/C.
- Issuing bank sends the L/C to the seller's bank (advising bank) in China.
- Seller manufactures and ships the goods.
- Seller presents shipping documents (B/L, invoice, packing list) to their bank.
- If documents are compliant, seller's bank pays the seller.
- Issuing bank debits the buyer's account and releases documents for customs clearance.
L/C vs T/T Comparison
| Factor | L/C | T/T (Wire Transfer) |
|---|---|---|
| Protection | Both parties (bank-guaranteed) | Limited (no third-party guarantee) |
| Cost | 1–3% of order value | $25–$50 per transfer |
| Complexity | High (bank documentation) | Simple |
| Best For | Large orders ($50K+), new suppliers | Established relationships, smaller orders |
When to Use L/C
- Orders over $50,000 with suppliers you haven't worked with before
- When you need maximum payment protection
- When your supplier requests L/C (some large factories prefer it)
- When you're importing regulated goods that require compliant documentation
Need Help with China Sourcing?
Our team handles the complexity of international trade terms, logistics, and factory negotiations so you don't have to.
Send Inquiry