Those who don’t understand use letters of credit, those who do understand don’t use them, and those who master them use letters of credit?

Some say:

This may be a summary from industry practitioners rather than a view shared by professionals. The following perspective is offered solely from the exporter's standpoint.

In practice, exporters who are unfamiliar with letters of credit are indeed quite reluctant to use them. Many who have been in foreign trade for years still keep this method at arm's length, with most continuing to rely on telegraphic transfers.

When it comes to choosing a payment method, the importer often holds the upper hand — after all, they control the funds. Unless the goods are in a seller's market where the importer must follow the exporter's terms, the reality is that exporters are usually in a much more passive position.

While it is ideally believed that this method provides payment security for exporters, please note that it is a conditional payment undertaking. Meeting those conditions involves not only high costs but also considerable effort behind the scenes.

The saying that those who understand it don't use LCs has some truth to it. The reasons remain high costs and cumbersome procedures. If the importer is a long-standing client with good payment credibility, why pay extra bank charges? Why take on more hassle? Why potentially even need to hire an additional staff member?

The claim that experts use LCs has no scientific basis. The choice of settlement method depends on the importer's cash flow situation and the trade background. Sometimes it is not a matter of simply choosing to use one.

Those well-versed in LCs who actively seek to use this method mostly do so for financing purposes. However, LCs generally provide post-shipment financing, which offers relatively low cost-effectiveness for exporters unless they receive usance LCs. Pre-shipment financing, on the other hand, falls under working capital loans, which impose higher requirements on the exporter's collateral and pledge capabilities — requirements that most asset-light, small and medium-sized exporters clearly cannot meet.

In summary, as an exporter, if your goods are in a seller's market, you have considerable freedom in choosing the payment method. If it is a buyer's market, whether you understand LCs or not is almost irrelevant to the decision. In reality, the vast majority of goods exported by our country are mid- to low-end products, predominantly in a buyer's market, so there is very little room for choice.

What the uninformed see: LCs rely on bank credit (primary payment obligation of the bank) and carry low risk;

What the knowledgeable see: LCs involve higher bank charges and more complex procedures; sometimes documentary collection can be more efficient;

What the experts see: LCs are not only a mature settlement tool but also offer certain financing functions. With strong flexibility, they can be structured into composite products to achieve better financing results.

The uninformed use LCs — Beginners are unaware of how significant the risks and costs of LCs can be.

The knowledgeable avoid LCs — First, high risk; second, high cost; third, long negotiation cycles and slow payment collection. T/T is simpler, faster, lower cost, and lower risk.

The experts use LCs — For bulk commodities or major clients with good credit standing, who would give you a deposit? Dream on — it's all LCs. Even getting an LC is considered a big favor. Many large clients operate on OA (Open Account), also known as consignment or credit sales, with payment made three to six months after shipment. That's how powerful major clients are, and they have the capital and credit to back it up. Their attitude is: take it or leave it.

In summary, whether to use this payment method depends entirely on who the client is and whether they are trustworthy.

It makes no sense for those unfamiliar with LCs to use them. If you can't even understand a letter of credit, how can you work with one? LCs contain many clauses, especially some soft clauses that require careful identification. You need to know which ones are acceptable and which must be firmly requested for amendment or even deletion by the customer. These details directly affect whether you can safely collect payment.

For example, a letter of credit issued by a Bangladeshi customer contained a soft clause requiring a declaration stating that "the fabric does not contain Xinjiang cotton." However, the fabric we produced had no cotton content at all. Logically, we did not include this declaration in the documents presented. But when the documents reached the Bangladeshi bank, they pointed out that this document was missing. Only after we provided the missing declaration did they accept the LC.

This example illustrates that if you cannot understand certain clauses in an LC, it leaves room for the customer or bank to exploit loopholes. Over minor issues, they can deduct payments or refuse to honor the credit.

Those who are experienced may avoid LCs because the process is quite cumbersome. It requires strict consistency between documents and between documents and the credit. When dealing with LCs from Bangladeshi banks, which often demand numerous documents, it becomes even more troublesome.

Experts use LCs because they are based on bank credit, which is more reliable than commercial credit and can minimize risks. Generally, as long as your goods are shipped normally and documents are presented as required by the LC, payment will arrive on time. Compared to some other payment methods, the risk is lower.

Of course, small businesses don't need to open LCs. Everyone should understand that credit is always a scarce commodity!

For the three sentences above, it is important to clarify which party the "person" mentioned refers to — the buyer or the seller. The first two sentences refer to the seller. The last sentence refers to the buyer.

As a seller, the most desirable payment method is of course 100% T/T in advance before arranging production. To put it bluntly, the main reason a letter of credit is required is the seller's lack of creditworthiness. In other words, the buyer is not confident that the seller can deliver the products as required, so they settle the transaction via L/C — this has absolutely nothing to do with the era we live in!

Sellers who do not understand L/Cs think that letters of credit offer security, so they accept or even request L/C payment terms.

Sellers who know a little about L/Cs are aware of the potential risks but do not know how to mitigate them, so they are reluctant to accept L/C terms.

Buyers who are well-versed in L/Cs can fully leverage them to serve their own interests. Some unscrupulous international traders even use L/Cs to commit fraud. (This is no exaggeration — in international trade, cases where both goods and payment are lost are essentially L/C fraud!)

In fact, as long as you maintain a balanced mindset, eliminate greed, carefully review the L/C terms, make full use of your bank's expertise, and ideally involve a credit insurance company, you can almost completely avoid the risks associated with L/C payments!

A letter of credit is merely a tool, and it is still difficult to escape fraud. Ultimately, it comes down to trust between the buyer and the seller.