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Paying the supplier

Bank transfer or letter of credit? How to choose the supplier payment method before you sign

The supplier payment method is decided in the contract, but it shows up in the shipping: when the goods are loaded, who holds the documents, and what happens if something is late. This is a general explanation of the two most common methods, bank transfer and letter of credit, and what each means for your shipment.

Transfer: faster and simplerLC: the bank pays against documentsChoose before signing
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Published · MIDTRANS SHIPPING AND SERVICES

Reviewed by Khaldoun Al-Khouli, General Manager

In this updateTransfer or letter of credit

Two ways to pay and what each means for shipping

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Bank transfer

Direct payment to the supplier; the risk is on whoever pays or ships first.

Letter of credit

The bank pays when documents matching the terms are presented.

Documents

Under an LC, any discrepancy in the documents can delay payment.

Timing

Agree the method before signing, not after loading.

Bank transfer

Bank transfer: faster and simpler

With a bank transfer (TT) you send the money from your account straight to the supplier's. The most common pattern is a deposit with the order and the balance before loading or against a copy of the bill of lading. Some suppliers accept full payment after arrival from customers they know.

Its advantages are speed, simplicity and lower bank charges. But the risk falls on whoever moves first: if you pay upfront you rely on the supplier shipping what you agreed, and if the supplier ships first it relies on you paying.

  • Deposit, balance before loading, or as agreed
  • Lower bank charges
  • Risk on whoever pays or ships first
Illustrative image
Illustrative image

Letter of credit

Letter of credit: the bank pays against documents

With a letter of credit (LC) the importer's bank undertakes to pay the supplier, on condition that the supplier presents documents that match what the credit says: the invoice, packing list, bill of lading, certificate of origin and others as required. The process is usually governed by the International Chamber of Commerce rules known as UCP 600.

The supplier is reassured because the bank pays, and the importer is reassured because payment is made only after the goods are shipped and their documents presented. But an LC costs more in bank charges, takes time to open, and demands complete accuracy in the documents.

Documents

Where payment meets shipping

Under an LC the bank checks the documents word for word. If the goods description differs between the invoice and the bill of lading, the shipment date falls after the latest date in the credit, or a required document is missing, the bank may refuse to pay until the discrepancy is corrected or the importer accepts it.

So the forwarder needs to know the LC terms before booking: port of loading and port of discharge, latest shipment date, whether partial shipment or transhipment is allowed, and how the bill of lading must be issued. At MIDTRANS we ask for these terms with the booking and issue the shipping documents accordingly.

  • Latest shipment date
  • Port of loading and port of discharge
  • Partial shipment and transhipment
  • Bill of lading details as the LC requires

Before signing

Choose the method before you sign

The payment method is part of the contract with the supplier, and changing it after loading is hard. So agree it with the supplier before signing, and ask your bank which options are open to you. Banking linked to Syria may involve restrictions or extra procedures, and it has been changing recently; we followed this in the correspondent banking talks.

This is a general explanation, not financial advice. The decision is yours and your bank's; our part is making sure the shipping documents match what you agreed. Tell us the payment method and its terms before booking and we plan the shipment around them through request a quote.

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FAQ

Frequently asked questions

What is the difference between a bank transfer and a letter of credit?

With a transfer you pay the supplier directly and the risk is on whoever pays or ships first. With an LC the bank pays when the supplier presents documents matching the terms, so it is safer and costs more.

Why might the bank refuse to pay under an LC?

If the documents do not match the credit's terms, for example a different goods description, a late shipment date or a missing required document.

When should I choose the payment method?

Before signing the contract with the supplier, because changing it after loading is hard.

What does the forwarder need from the LC?

The latest shipment date, the ports of loading and discharge, whether partial shipment and transhipment are allowed, and how the bill of lading must be issued.

Have an LC or a payment agreement with your supplier?

Send us its terms with the shipment details and we will plan the booking and documents around them.

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