Letters of Credit

When getting started with a new company in manufacturing, you may find that you need some extra security when it comes to payment for services provided. Using a letter of credit is a way of making sure the seller will be paid for the merchandise and the buyer will receive the merchandise according to the agreed upon terms.

A letter of credit is especially useful when dealing with a company in a part of the world that is new to you. You may not understand their native language or you may have different expectations for the transaction. A letter of credit spells out each part of the transaction from what you are shipping to whether its airfreight or ocean freight and this allows transparency in the process for both parties. The downside for letters of credit is that there is a third party involved and that is a bank. Any bank you use will require everything to be exact in order for the merchandise to be delivered. This includes relatively small things like how details are written on the commercial invoice. If everything is not in order exactly, your merchandise can be held up and there is nothing even your freight forwarder can do to get it released until it matches the letter of credit.

Before getting started, make sure a letter of credit is necessary in order to do business. You may want to get started with using one on the first few shipments, but eventually you will need to begin trusting one another as partners of the same product. While it can be a useful tool, sooner or later you should find that a letter of credit is no longer necessary.