Is a letter of credit worth it for a small importer? How LCs work
Updated
A letter of credit (LC) is a bank's promise to pay your supplier once the supplier shows documents proving it shipped what you agreed. It protects both sides on a large first order, but it costs more and takes more paperwork than a wire or card. For most smaller or repeat orders, a wire to verified details or a card is simpler. An LC is worth considering on big first-time deals.
How an LC works
- You and the supplier agree terms in a contract or purchase order.
- You ask your bank to issue the LC in the supplier's favor, listing the documents required, such as the invoice, bill of lading and packing list.
- The supplier's bank is told and the supplier ships.
- The supplier presents the documents. The bank checks them against the LC.
- If the documents match exactly, the bank pays. If not, it can refuse until they are fixed.
- You reimburse your bank and receive the documents to collect the goods.
The key point: banks deal in documents, not goods. The LC protects you only to the extent the required documents prove what you care about. A vague LC can still let a bad shipment through.
Costs and friction
- Bank fees for issuing and amending an LC, which vary by bank. Ask for the schedule.
- Your bank may want collateral or a credit line.
- Small mismatches, like a name spelled differently, can stall payment.
- Setup takes time.
Wire, card and LC side by side
| Wire | Card | Letter of credit | |
|---|---|---|---|
| Who it protects | Mostly the supplier | Buyer may have dispute options, depending on the card agreement | Both, if the documents are well written |
| Speed to set up | Fast | Fast, if supplier accepts cards | Slow |
| Cost | Wire fees | Possible supplier surcharge | Highest, usually |
| Reversibility | Hard to undo | Dispute rights depend on the card | Payment on compliant documents |
| Best for | Verified suppliers, larger orders | Samples, smaller and repeat orders | Large first-time orders |
What to do with a new supplier
- Verify the supplier first. Check registration, references and bank details by phone using contact information you found independently.
- Start small. Use a card for samples or a first order where accepted.
- Split payments. A deposit up front and the balance against shipping documents.
- Use an LC for big first orders if both sides will accept it.
- Never wire to details sent by email without confirming them. The FBI's Internet Crime Complaint Center warns about altered payment instructions.
The trade.gov Trade Finance Guide covers LCs and other payment methods in more depth.
How Shield fits
Shield doesn't replace an LC for a large first-time deal, but it covers the other options. Shield's business credit card is made for supplier spending: pay by card where it is accepted, and where it isn't, send a wire from your credit line. It's a pay-in-full card with no interest and no upfront or subscription fees for cardholders. Limits are based on company revenue, cash flow, reserves and operating history, with no personal credit check and no personal guarantee. Shield also pays suppliers in China and Hong Kong. Owners can live outside the US, with a US company.
FAQ
Is a letter of credit safer than a wire? It can be, when the required documents prove the shipment you want. A wire is final once sent, so verify details first.
How long does an LC take to set up? It depends on your bank and the supplier's. Ask both.
Can a small business get an LC? Banks decide case by case and may ask for collateral or a credit line.
Next step
To see how Shield handles supplier payments by card and wire, visit Shield business credit cards.