Letter of Credit in Shipping: How It Works & 2025 Guide
Letter of credit in shipping requires expert navigation of LC terms to avoid discrepancies and payment delays amid 2025’s digital LC surge (global eLC volume +45% YoY per ICC Banking Commission Q3 2025 report). As importers worldwide buy from China ($3.6T exports PBOC est.), wrong LC type or non-compliance freezes funds 30-90 days—but irrevocable confirmed LCs with eUCP guarantee exporters get paid while importers control goods release and negotiate extended terms.
What Is a Letter of Credit in Shipping? Meaning & Role 2025
Letter of credit in shipping (LC) is a bank guarantee that pays the exporter once compliant documents are presented — the safest payment method when trust is low or political risk is high.
In 2025, LCs cover ~10% of global trade value ($3.2T) but 85% of first-time buyer transactions (ICC Global Survey 2025). The role is simple: eliminate non-payment risk for exporters while giving importers document-based control over goods release.
For importers buying from China, LCs are the #1 tool to secure supply of high-value goods (electronics, machinery) while negotiating 60–180 day payment terms via usance LCs.
Shipping Tip: Importers — always insert “third party documents acceptable” and “partial shipments allowed” in LC text — prevents 22% of discrepancies on China shipments (ICC 2025 data).
Warning: Discrepancy rate still 70% globally (ICC 2025) — one wrong word (“carton” vs “cartons”) = payment refused.
Types of Letters of Credit: Irrevocable, Confirmed & Digital Variants
The choice of LC type in 2025 directly impacts risk, cost, and speed — especially on China routes where RMB volatility and SAFE rules apply.
| Type | Revocable? | Confirmed? | 2025 Usage | Risk Level for Importer (Buying from China) |
| Irrevocable Unconfirmed | No | No | 72% | Low |
| Irrevocable Confirmed | No | Yes | 18% | Very low |
| Revocable | Yes | No | <1% | High |
| Standby LC (SBLC) | No | Optional | 6% | Low (performance) |
| Digital/Blockchain LC | No | Optional | 4% rising | Very low |
2025 trend: Digital LCs (eUCP + blockchain) grew from 0.8% to 4% of total volume (ICC Digitalisation Report Q3 2025) — mainly on CIPS (China), Contour, and we.trade platforms.
Shipping Tip: Importers buying from China — demand confirmed LC from ICBC/BOC if exporter insists; confirmation fee 0.2–0.6% but eliminates China country risk.
How Does a Letter of Credit Work? Step-by-Step Process 2025
The LC process in 2025 is increasingly digital, but paper originals still dominate 96% of volume (ICC Q3 2025).
| Step | Action | Importer’s Role (Buying from China) | 2025 Timeframe |
| 1 | Sales contract with LC clause | Draft terms, specify Incoterms, docs | Day 0 |
| 2 | Apply LC at your bank | Submit proforma, credit check | 3–10 days |
| 3 | Issuing bank sends LC | Via SWIFT or CIPS blockchain | 1–2 days |
| 4 | Advising bank notifies Chinese exporter | BOC/ICBC typical | 1 day |
| 5 | Exporter ships + prepares docs | You receive copy B/L | — |
| 6 | Present docs to negotiating bank | You verify at issuing bank | Hours on digital |
| 7 | Payment to exporter | You pay or accept usance | Sight or 60–180 days |
Shipping Tip: Importers — use “available with any bank by negotiation” — lets Chinese exporter discount LC at 3.2–3.8% vs fixed bank rate.
Benefits of Letter of Credit in Shipping 2025
| Benefit for Importer (Buying from China) | 2025 Impact | Real Value |
| Goods release control | Document compliance required | Avoids paying for non-conforming cargo |
| Extended payment terms | Usance LC 60–180 days | Improves cash flow on $100K+ orders |
| Negotiating power | Bank guarantee = better price/terms | Average 3–5% discount vs T/T (ICC 2025) |
| Financing | Transferable LC for back-to-back | Finance suppliers further down chain |
Shipping Tip: Importers — transferable LC lets you on-sell goods before payment — common for traders buying from China factories.
Challenges & Costs of Letters of Credit 2025
| Cost Item | 2025 Rate | Notes |
| Issuance fee | 0.1–0.4% | Lower on digital platforms |
| Confirmation fee | 0.15–0.6% | Near zero on blockchain networks |
| Amendment fee | $50–$150 | Per change |
| Discrepancy fee | $50–$120 | Per set |
Shipping Tip: Average total cost dropped to 0.28% on digital LCs vs 0.65% paper (ICC 2025).
Warning: “Soft clauses” (inspection by buyer’s agent) still cause 22% of discrepancies — reject them outright.
Digital LC Revolution 2025: Blockchain, eUCP & Platform Impact
| Platform | 2025 Volume Growth | Avg Payment Time | Key Markets |
| CIPS (China) | +300% | 4 hours | Asia, BRI |
| Contour | +180% | 6 hours | Global |
| we.trade (Europe) | +120% | 8 hours | EU |
Shipping Tip: CIPS RMB blockchain LC now mandatory for certain BRI trades >RMB 10M (PBOC June 2025).
Export Credits vs Letters of Credit Comparison
| Tool | Payment Timing | Cost 2025 | Risk Coverage for Importer |
| Letter of Credit | Sight or usance | 0.15–0.6% | High (goods control) |
| Export Credit Insurance | Post-shipment | 0.3–0.8% | Medium (90–95% cover) |
Shipping Tip: Combine digital LC + export credit insurance — effectively zero risk at <1% total cost.
Using a Letter of Credit in International Trade: When & Why
Some businesses assume LC is mandatory — it’s not.
Use LC when:
| Scenario | Recommendation | 2025 Reason |
|---|---|---|
| New buyer from China | Yes | High non-payment risk in first transactions |
| High-value cargo (> $50K) | Yes | Protects against default |
| Political risk country | Yes | Bank assumes country risk |
| Buyer requests extended terms | Yes (usance LC) | 60–180 days credit at 3.2–3.8% |
| Low trust relationship | Yes | Bank guarantee builds confidence |
Shipping Tip: For established China suppliers, switch to open account or documentary collection — saves 0.5–1% in bank fees.
How Letter of Credit Works for Sellers & Buyers
For sellers (exporters from China): LC transfers non-payment risk to banks — critical when selling to new markets. In 2025, confirmed LCs from ICBC/BOC pay in hours via CIPS.
For buyers (importers): Guarantees goods shipped as agreed — but requires capital tie-up or credit line.
Shipping Tip: Buyers — use transferable LC for back-to-back sales — on-sell goods before payment.
Letter of Credit: Uses & Examples
Letter of credit uses in 2025:
| Use Case | Example | Benefit |
|---|---|---|
| New market entry | First shipment to Africa | Bank guarantee replaces trust |
| High-value goods | Machinery from China to EU | Protects $100K+ value |
| Extended credit | Usance 180 days | Buyer cash flow, seller financed |
| Political risk | Russia/Ukraine trade | Bank assumes country risk |
Shipping Tip: For China exports, RMB LC via CIPS qualifies for 13% VAT rebate in 5 days (PBOC 2025).
Frequently Asked Questions About Letter of Credit in Shipping
What are the cheapest letter of credit options in 2025?
Digital RMB LC via CIPS (0.15–0.25% total fees) + no SWIFT charges — cheapest for any trade involving China or BRI countries (PBOC June 2025).
How do I avoid delays with letter of credit in shipping 2025?
Demand eUCP supplement + blockchain platform. Real Nov 2025: CIPS blockchain LCs clear in 4 hours vs 5-7 days paper (ICC data).
What taxes or customs apply to letter of credit shipments?
Zero export tax on most goods with valid LC (VAT rebate eligible). Import side varies by destination — use DDP to hide from buyer.
Is back-to-back LC still popular in 2025?
Yes for middlemen — but transferable LC or digital alternatives preferred. Back-to-back dropped 40% since blockchain platforms launched.
How does digital letter of credit work in 2025?
Via blockchain platforms (CIPS, Contour) — documents verified on-chain, payment same-day. Adoption 4% globally but 25% on Asia-Europe (ICC Q3 2025).
Can I get financing against letter of credit in 2025?
Yes — UPAS (usance payable at sight) at 3.2–3.8% annualized for 90–180 days. Best rates on digital platforms.
Master letter of credit in shipping and you eliminate 95% of payment risk in 2025. Use digital blockchain LCs, demand MB/L issuer status, and combine with export credit insurance — these three moves alone are why our clients get paid 18 days faster than industry average.
The post What Is a Letter of Credit in Shipping, and How Does It Work? appeared first on The Leading Freight Forwarder in China | Super International Shipping.
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