Using a Letter of Credit in International Shipping

Many people who are just starting out in international trade, and even some who have been in a long time, find it hard to trust foreign companies. Maybe they have heard some horrible stories or lived through some themselves. They still want to be in business and they need a sure fire way to know they do not get scammed, especially with a new vendor or shipping agent. This is where a letter of credit comes in. Letters of credit are legal documents that are specifically designed to keep a clean smooth transaction whereby each side agrees on the exact way that all parts of the shipment will run. This starts from the very beginning of the process well before the product is shipped and closes once the goods are received in good order on the other side. While this sounds like a wonderful safeguard for protecting your shipment, it can also make it more difficult and create delays in the international shipment. In a letter of credit, a bank will only pay based on the rules in the letter of credit. Everything must be exact including the shipping costs, the steamship line being used, the logistics companies and any costs involved. So if there are any changes along the lines, the payment will only be made according to the agreement. This may leave a shipper facing delays in receiving goods and there could be additional costs or other challenges that normally the supplier would be responsible for. This is the biggest drawback of a letter of credit. In many situations it can make sense to use a letter of credit especially in the beginning of your relationship, but at some point you may find it much easier to trust your agent and vendors to make the shipment run through smoothly and quickly.