International Trade Payment and Letter of Credit Guide

International trade payment is a core part of the import-export process. Different payment methods correspond to varying risk levels and capital occupation costs. This article systematically introduces the main payment methods of international trade and the detailed operations of letters of credit.

I. Main International Trade Payment Methods

T/T (Telegraphic Transfer)

Telegraphic Transfer (T/T) is one of the most commonly used payment methods in international trade.

• Upfront T/T: Receives full payment before shipment, minimizing seller risk and maximizing buyer risk.
• Back-end T/T: Receives full payment after shipment, minimizing buyer risk and maximizing seller risk.
• Mixed T/T: For example, 30% prepayment + 70% balance against copy of bill of lading, is a common compromise solution.

L/C (Letter of Credit)

A Letter of Credit (L/C) is a conditional payment commitment by a bank—the bank promises to pay after the beneficiary presents documents that comply with the L/C terms. The L/C introduces bank credit, reducing the trust risk between buyers and sellers.

D/P (Documents against Payment)

Documents against Payment (D/P) means the buyer has the bank release documents such as the bill of lading only after paying the full amount. In D/P, the bank bears no payment obligation and only transfers documents.

D/A (Documents against Acceptance)

Documents against Acceptance (D/A) allows the buyer to obtain documents and take delivery of goods after accepting the draft, with payment due at a later date. D/A is favorable for the buyer but riskier for the seller.

II. Detailed Explanation of Letter of Credit (L/C)

Basic Parties to a Letter of Credit

• Applicant (Importer)
• Issuing Bank (Importer's Bank)
• Beneficiary (Exporter)
• Advising Bank (Bank in the Beneficiary's Country)
• Negotiating Bank (Bank willing to purchase the Exporter's draft)

Letter of Credit Operational Process

1. The exporter and importer sign a contract agreeing to settle via L/C.
2. The importer applies to the issuing bank to open a letter of credit.
3. The issuing bank opens the L/C and sends it to the advising bank.
4. The advising bank notifies the exporter that the L/C has been opened.
5. The exporter ships the goods according to the L/C terms and prepares documents.
6. The exporter submits documents to the negotiating bank.
7. The negotiating bank reviews the documents and pays if compliant (negotiation).
8. The negotiating bank sends the documents to the issuing bank.
9. The issuing bank reimburses the negotiating bank after reviewing the documents.
10. The importer pays the issuing bank to receive the documents.

Types of Letters of Credit

• Sight L/C: Payment by the bank upon presentation of documents.
• Usance L/C: Payment by the bank at a specified future date.
• Confirmed L/C: A second bank adds its confirmation, providing dual payment guarantees.
• Transferable L/C: The beneficiary can transfer part or all of the amount to others.
• Revolving L/C: Allows reuse within a specific period.

Key Points for L/C Review

Upon receiving a letter of credit, the exporter should carefully review the following:

1. Whether the L/C type is consistent with the contract.
2. Whether the goods description, quantity, and amount are consistent with the contract.
3. Whether the shipment date, expiry date, and presentation period are reasonable.
4. Whether the documentary requirements can be fulfilled.
5. Whether there are any "soft clauses" (conditions difficult to meet).
6. What the reputation of the issuing bank is.

Common L/C Discrepancies and Resolution

Common discrepancies include: invoice amount inconsistent with the L/C, bill of lading date later than the latest shipment date, incomplete documents, and conflicting information between documents. Upon receiving a discrepancy notice, promptly communicate with the customer to amend or apply for acceptance of discrepancies.

III. Principles for Choosing Payment Methods

Further Reading

For more related content, we recommend the following handbooks from the Borfeng Logistics website:

• 🌐 Foreign Trade Basics Manual: Comprehensive coverage of foreign trade basics, trade terms, settlement methods, and foreign trade risks.
• 📘 International Shipping Operations Manual: International shipping process, cost structure, bill of lading operations, etc.
• 📙 Complete Customs Clearance Guide: Customs clearance process, HS codes, tariff calculation, etc.

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