An LC for tile imports is a bank guarantee: your bank promises to pay the factory when it presents documents that match the credit exactly. CAD for tiles, or cash against documents, means you pay through the banks when the shipping documents are presented, and you receive them only on payment.
Both routes sit between a cash advance and open credit. They tie payment to shipment, which is the main reason importers choose them.
How does a letter of credit work?
You apply to your bank to issue a letter of credit in favour of the factory. The terms state the goods, the documents required, the latest shipment date and the expiry. Most trade credits follow the ICC rules known as UCP 600.
The factory ships, then presents the documents, which usually include the commercial invoice, packing list, bill of lading and inspection or origin certificates. The banks check them against the credit. If they match, payment is made. If they do not, the bank can refuse, and the factory must correct them or ask you to waive the discrepancy.
How does CAD work?
Under cash against documents, the factory sends the shipping documents through its bank to your bank. You pay and receive the documents, then collect the goods. Collections usually follow ICC Uniform Rules for Collections.
A bank only acts as a go-between here. It does not guarantee payment. If you do not pay, the factory has goods at a foreign port and must find another buyer or bring them back. That is a risk for the factory, so many factories prefer an LC for a new buyer.
Which route suits which buyer?
The right route depends on trust, order size and cost:
- An LC suits a first or large order, because the factory is paid on shipment against documents and you pay nothing until the documents are correct.
- CAD suits a repeat relationship, because it is simpler and has lower bank charges, but it gives the factory less certainty.
- A cash advance suits only small or trusted orders, and carries the highest risk for you.
What does each route cost, and where do they go wrong?
Both routes carry bank charges, which differ by bank and country. An LC costs more because of the issuance, advising and any confirmation fees, and amendments add more. Ask your bank for a written schedule before you agree.
The main failure in an LC is a document discrepancy, such as a spelling difference or a late shipment date. Check the credit terms with the factory before you open it, and make sure the documents it requires are ones the factory can actually produce; see the tile export documents and the document pack your broker will ask for.
Remember that banks check documents, not goods. An LC does not prove the tiles are the right grade. Pair it with an inspection certificate; see the tile pre-shipment inspection report.
Next step
For payment advice specific to your bank and country, speak to your bank and a trade adviser. We can set the inspection and documents so that your credit or collection works smoothly. Book a free sourcing review. Related reading: safest payment terms for tile imports.