Two charger orders of similar value were placed in the same quarter. One ran on a deposit with the balance against the documents, and cost the buyer a bank fee of a few tenths of a per cent. The other ran on a documentary credit and cost both parties a fee, a set of discrepancies and eleven days of delay while a packing list was corrected. The instrument was not the problem; the mismatch between the credit and the shipment was.
Letter of credit for charger orders: what it actually does
It substitutes a bank’s undertaking for the buyer’s.
The supplier is paid against a defined set of documents rather than against the buyer’s willingness to pay, and the buyer’s money is released only when those documents are presented. Neither party has to trust the other, which is precisely why the instrument carries a cost.
Two orders, one instrument
The difference was drafting, not the mechanism.
The first order’s credit named four documents, all of which the supplier issued itself. The second named nine, including a certificate from a party with no involvement in the shipment, and the missing certificate stopped the presentation. A credit that names documents the supplier cannot produce is a delay written into the contract.
Where the cost sits
Four lines, and two of them are invisible at the quotation stage.
The issuing fee at the buyer’s bank, the advising and confirmation fee at the supplier’s bank, the amendment fee where the credit has to be changed, and the cost of the delay when a presentation is refused. The first two appear on the tariff; the other two appear in the programme schedule.
What the credit has to match
The goods description, the quantity, the date and the route.
A credit describing the product differently from the commercial invoice creates a discrepancy on the first presentation, even where both descriptions are accurate. The wording is checked against the invoice before the credit is opened rather than after the goods have sailed.
The documents a charger credit usually calls for
Four to six, and each has to be issuable.
The commercial invoice, the packing list, the transport document, the certificate of origin where a preference is claimed, and the inspection record where one was agreed. Each is checked for the issuer, the number of copies and the wording the credit requires.
| Document | Issued by | Common discrepancy | How to prevent it |
|---|---|---|---|
| Commercial invoice | Supplier | Goods description differs from the credit | Copy the credit wording exactly |
| Packing list | Supplier | Carton count differs from the transport document | Reconcile before presentation |
| Transport document | Carrier | Late shipment or a port not named in the credit | Check the cut-off against the booking |
| Certificate of origin | Chamber or authority | Issued after the deadline | Apply when the invoice is raised |
Discrepancies, and why they cluster
They cluster around the three documents nobody owns.
The transport document issued by the carrier, the certificate issued by a chamber, and the inspection record issued by a third party. Each is produced by someone outside the two contracting parties, and each is the reason a presentation is refused rather than accepted.
When a credit is the right instrument
Three situations, and the first is the usual one.
A first order between parties with no history; a value large enough that the fee is small relative to the risk; and a buyer whose own credit line requires a documentary instrument. Outside those, the deposit and balance structure is normally cheaper for both sides.
What to agree before the credit is opened
Four items, and the fourth is the one that saves the most time.
The goods description exactly as the invoice will read, the document list with the issuer of each, the latest shipment date against the actual booking, and the presentation period. Agreeing those four before the application is drafted prevents most of the amendments a credit otherwise attracts.
What the application is drafted from
The credit is drafted from the contract and the shipment rather than from the product description alone. The goods description, the document list, the latest shipment date and the presentation period all come from the order, and each has to match what the factory can actually issue.
That is why the document list is checked against the factory before the application is submitted. A credit naming a certificate from a party with no involvement in the shipment is a discrepancy created at the drafting stage rather than at the presentation.
The second check is the date. A latest shipment date is written against a booking rather than against a production plan, and the difference between the two is where amendments are most often needed.
A programme that checks the two before submitting pays one fee instead of two.
FAQ
Is a letter of credit the same as a bank guarantee?
No. A credit is a payment undertaking that operates on documents; a guarantee is a separate undertaking that responds to a breach of the underlying contract. The two are used for different purposes and are priced differently. The two respond to different events, so the choice follows whether the risk being covered is payment against documents or a breach of the contract.
What happens if the documents are refused?
The bank holds the presentation and the payment stops until the discrepancy is accepted by the buyer or the documents are corrected. Each day of that process is a day the supplier is unpaid and the goods are static. The correction is the buyer’s decision, and each day of the process is a day the supplier is unpaid and the goods are static.
Can the credit be amended after it is opened?
It can, and amendments carry a fee and require the agreement of all parties. That is why the shipment date and the document list are worth checking before the application is submitted. Check the shipment date and the document list first, because both are drafted from the order and both are the usual reason an amendment is raised. Check both against the booking rather than the production plan.
Does a credit remove the need for inspection?
It does not. A credit checks documents, not goods, so where inspection matters it is built into the arrangement as a required certificate or handled separately. Where inspection matters it is built into the arrangement as a required certificate, because a credit checks the documents rather than the goods. Otherwise the inspection is assumed to be covered when the credit says nothing about it.
Next step
Send the order value, the route and the documents your bank requires to Wecent Group through the contact page. The reply confirms the document set the factory can issue and the shipment dates that fit it. Related reading: charger manufacturing services, our charger factory and charger quality control. External references: ICC business solutions for trade, SWIFT messaging standards, European Banking Authority, Bank for International Settlements, World Trade Organization and ITC Trade Map.
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