In the garment trade, buyers and exporters often work oceans apart — different time zones, different legal systems, and sometimes even different languages. While fashion trends may move fast, payments must move securely.
When millions of dollars’ worth of apparel is moving from one country to another, trust alone is not enough. Both sides need a mechanism that ensures:
- The exporter gets paid if they meet the contract requirements.
- The importer only pays if the goods are shipped as agreed.
This is where the Letter of Credit (LC) steps in — a trusted, bank-backed payment guarantee that has been the backbone of international trade for decades. For the garment industry, where shipment timelines and quality standards are critical, the LC remains one of the safest and most widely used payment methods.
What Is a Letter of Credit?
A Letter of Credit is a document issued by a bank on behalf of the buyer (importer) that guarantees payment to the exporter (seller), provided the exporter meets all the terms and conditions stated in the LC.
Think of it as a financial handshake between two banks, with the exporter and importer standing behind them. The banks ensure the money moves only when the agreed requirements are met.
Example scenario:
- Exporter: Amir, a garment manufacturer in Asia.
- Buyer: Sarah, a fashion retailer in London.
Sarah places an order for 50,000 dresses. Her bank issues an LC promising that payment will be made to Amir’s bank once Amir ships the dresses and provides the exact documents specified — like the Bill of Lading, Commercial Invoice, and Packing List.
Why the LC Is So Important in Garment Trade
Garment exports involve strict delivery deadlines, seasonal collections, and often large volumes. A delay or dispute over payment can seriously damage business relationships. LCs help solve this by:
Reducing Risk: The bank acts as a trusted middleman, guaranteeing payment.
Ensuring Compliance: Exporters must follow the LC’s instructions precisely — from shipment dates to labelling requirements.
Supporting Large Orders: Buyers feel more confident placing bulk orders knowing payment will only be made if everything is correct.
Improving Cash Flow Planning: Exporters can commit to production schedules knowing that once they comply, the bank will release payment.
The Main Parties in an LC
- Applicant: The buyer/importer who applies for the LC.
- Issuing Bank: The buyer’s bank, which issues the LC and promises payment.
- Beneficiary: The exporter/seller who will receive the payment.
- Advising Bank: The exporter’s bank, which authenticates and delivers the LC to them.
- Confirming Bank (optional): Adds its own guarantee to the LC, used when extra security is needed.
- Negotiating Bank (optional): The bank that examines documents and may advance payment before reimbursement from the issuing bank.
How the LC Process Works in Garment Trade
Here’s a step-by-step view:
- Agreement: Buyer and exporter agree on contract terms — product specs, price, shipment date, and payment via LC.
- LC Issuance: Buyer applies to their bank for an LC in favour of the exporter.
- Notification: The issuing bank sends the LC to the exporter’s bank (advising bank).
- Review: Exporter checks the LC carefully to ensure it matches the contract. If changes are needed, they request an amendment.
- Production & Shipment: Exporter manufactures and ships goods within the agreed timeframe.
- Document Submission: Exporter submits all required documents to their bank.
- Document Checking: Bank verifies documents against LC terms.
- Payment Release: If all matches, payment is made to the exporter.
Types of Letters of Credit Used in Apparel Trade
- Sight LC: Payment is made as soon as documents are checked and approved.
- Usance or Deferred Payment LC: Payment is made after a credit period (e.g., 60–90 days after shipment).
- Confirmed LC: A second bank guarantees payment in addition to the issuing bank.
- Transferable LC: Allows the exporter to transfer part or all of the LC to another supplier.
- Back-to-Back LC: Used when the exporter needs to purchase raw materials from another supplier before producing the goods.
- Standby LC: Functions more like a safety net — payment is made only if the buyer fails to pay through other means.
Advantages of Using LCs
- Security for both buyer and seller.
- Reduced risk of fraud.
- Facilitates trade between unfamiliar partners.
- Enables financing options for exporters.
Challenges and Risks
Strict Document Compliance: Even a small typing error can cause rejection.
Bank Charges: LC processing fees and amendment costs can add up.
Time Pressure: Seasonal deadlines in fashion can make LC compliance stressful.
Complexity: New exporters often need training to handle LC requirements.
Practical Tips for Exporters
Read the LC Carefully: Understand every condition — shipment dates, document types, quantity, product descriptions, etc.
Negotiate Realistic Terms: Avoid agreeing to deadlines that are too tight.
Use Experienced Banks: Work with banks that have strong international trade teams.
Train Your Team: Everyone involved — from production to shipping — should know the LC requirements.
Keep Communication Open: Regularly update the buyer and bank to prevent misunderstandings.
Double-Check Documents: Match every figure and description exactly to the LC.
LC Example in Practice
Let’s revisit Amir and Sarah:
- Sarah orders 50,000 cotton T-shirts for her UK retail chain.
- Sarah’s bank issues a Confirmed Sight LC in Amir’s favour.
- Amir ships the goods, prepares the required documents, and submits them to his bank.
- His bank verifies the documents and sends them to Sarah’s bank.
- Payment is released to Amir within a few days.
Without the LC, Amir might have worried about delayed payment or non-payment. With the LC, both parties had confidence in the deal.
LC vs Other Payment Methods
- Advance Payment: Good for exporters, risky for buyers.
- Open Account: Risky for exporters but attractive to buyers.
- Documentary Collection: Less secure than an LC, but simpler.
- LC: Balanced protection for both parties, though more complex.
Why LCs Remain Relevant in the Digital Age
Even as trade moves towards electronic platforms and blockchain solutions, the LC continues to be a standard because:
- It’s supported by globally recognised rules (UCP 600 by ICC).
- Banks worldwide understand and trust the process.
- It works well for large orders where mistakes could be costly.
Key Takeaways
- Letter of Credit = bank-backed guarantee for payment in garment trade.
- It protects both exporters and importers, reducing risk.
- Multiple types of LCs cater to different trade needs.
- Success depends on exact documentation compliance.
- While it involves fees and paperwork, the LC is still one of the safest tools for international apparel deals.
