Why do we use LC?

Why I Swear By Letters of Credit (LCs) in International Trade

Okay, real talk: international trade can be terrifying. Imagine shipping a massive order overseas, only for the buyer to ghost you. Nightmare fuel, right? That’s where my love for Letters of Credit (LCs) comes in. They’re honestly my safety blanket in the often-wild world of global commerce.

I used to be a nervous wreck with every international shipment. That nagging worry about non-payment kept me up at night. It’s not just about the lost revenue; it’s the wasted time, resources, and the sheer frustration of dealing with potential disputes. One particularly stressful experience involved a shipment to a new client in Southeast Asia. We’d agreed on payment terms, everything seemed legitimate, but after the goods shipped, communication went dark. Chasing payments became a full-time job, and we eventually recovered only a fraction of what we were owed. That experience cost us not just financially, but also in terms of team morale and lost opportunities. We were so busy chasing that one bad debt, we missed out on other potential deals.

That’s when I truly understood the value of LCs. They’re essentially a bank’s guarantee that the seller will get paid, as long as they meet the specified terms of the contract. Think of it as a financial safety net. The buyer’s bank issues the LC, promising payment to the seller’s bank once proof of shipment (like a bill of lading) is provided. This eliminates the risk of non-payment because the payment obligation shifts from the buyer – who might be unreliable – to their bank, which is (hopefully) a stable financial institution.

The International Chamber of Commerce (ICC) reported that in 2020, documentary credits (another name for LCs) facilitated around $2 trillion in global trade. That’s a huge chunk of international commerce, and it speaks volumes about the trust placed in this system.

The beauty of an LC lies in its risk mitigation. According to the World Trade Organization, small and medium-sized enterprises (SMEs) account for a significant portion of global trade. For these businesses, especially, the security offered by an LC can be transformative. They might not have the resources to absorb the loss from a large unpaid invoice, making the LC a crucial tool for enabling their participation in international markets.

Of course, LCs aren’t without their drawbacks. They can involve some paperwork and fees, which can be a slight hassle. However, compared to the potential cost of non-payment or lengthy disputes, these are minor inconveniences. In my experience, the peace of mind they provide is absolutely priceless.

Let’s be honest, trusting strangers across borders with significant sums of money can be nerve-wracking. LCs take that fear out of the equation. They foster trust, facilitate smoother transactions, and ultimately, allow businesses to focus on what they do best: producing and selling their goods. So, if you’re involved in international trade, I strongly encourage you to explore the benefits of Letters of Credit. They might just be the game-changer you’ve been looking for.