Payment terms are where trust between a Gulf buyer and a Chinese factory is really tested. A letter of credit (LC) is one of the oldest tools for managing that trust, and it still earns its place in larger transactions.
In this guide: the mechanics of an LC, why buyers and sellers each use it, and common pitfalls.
The Basic Mechanics
An LC is a guarantee issued by the buyer's bank, promising to pay the seller a specified amount once the seller presents documents proving the goods shipped exactly as agreed — commercial invoice, bill of lading, packing list, and often an inspection certificate. The bank pays based on documents, not on physically checking the goods itself.
Why Each Side Uses It
| Party | Benefit |
|---|---|
| Buyer | Only pays once shipment is proven through documents, not upfront on trust alone |
| Seller | Gets a bank's payment guarantee instead of relying purely on the buyer's word |
When an LC Makes Sense
LCs typically make the most sense for larger, one-off or early-stage orders where trust between buyer and factory hasn't yet been established through a track record. For smaller, recurring orders with a proven supplier, many importers eventually shift to simpler terms like a deposit plus balance on shipment, since LC bank fees add real cost.
Common Pitfalls
Discrepancies between the LC terms and the actual shipping documents — even minor ones like a misspelled company name — can delay or block payment entirely. Getting the LC terms right at issuance, matched precisely to what the factory will actually produce and ship, avoids this.
FAQ
Is a letter of credit better than a T/T (wire transfer) deposit?
Neither is universally better — LCs suit larger or first-time orders where trust is unproven; T/T with deposit + balance suits smaller, recurring orders with an established supplier relationship.
Who pays the bank fees for an LC?
This is negotiable between buyer and seller, but is commonly split or paid by the party requesting the LC (usually the seller requiring payment security).
What causes an LC to be rejected at payment?
Any discrepancy between the LC's stated terms and the actual shipping documents — wrong dates, mismatched quantities, or even minor spelling differences in company names.
Structure Safer Payment Terms with Keerki Limited
Keerki Limited helps Gulf-based clients structure payment terms — including LC documentation — that protect their interests while keeping factories comfortable enough to prioritize the order. Contact us to discuss payment structuring for your next order.
