Here’s a question from one of our readers inspired by an earlier article on irrevocable letters of credit:
When it comes to importing many things by the container, how shall I pay? What is the best and safest way to handle payment? Do I still use a letter of credit?
I would definitely think about a letter of credit if you’re shipping by the container load. A letter of credit will help you to negotiate with the supplier if the goods aren’t what you expected, arrive late, etc.
Her follow up
When I use a letter of credit at my bank, will I also purchase other insurance? I’m trying to get an idea of the payment method, just because I’ve heard stories from one importer in particular who received an empty container from Thailand. The best part is that he paid up front, as requested. And so, that importer advised me to get an insurance company to deal with payment. He also advised me to be there (in country) to take pictures of the packaged container and locked and sealed container. I won’t let these stories scare me, though. Instead, I want to be prepared that the company in Thailand I choose, won’t rip me off. So, is the letter of credit all I need? And, if the company refuses? eg. “I’d like the money upfront.” or “I’d like 50% now.”
From my response
By using a letter of credit, you’re basically giving your payment to a third party who will help verify that your supplier upholds their end of the agreement. They don’t get paid until the third party (the bank holding the letter of credit) verifies that they’ve met all the terms of the contract (e.g. your container is not empty). You will still want to consider insurance to protect against things that the supplier might not want to be liable for – like if the shipment is damaged or lost in transit. For large shipments worth a lot of money, use both.