.svg){kind=icon}
What Is a Letter of Credit (LC) in Importing? A Plain-English Guide (Singapore)
.svg)
Last updated: 18 June 2026
In short: A letter of credit (LC) is a guarantee from a bank that your supplier will be paid — but only once they prove they shipped the goods exactly as agreed. It shifts the payment risk from you and your supplier onto two banks. For Singapore importers placing large or first-time orders with a Chinese factory, an LC can be a powerful safety net. For small repeat orders, it's often overkill.
What is a letter of credit, in plain English?
A letter of credit is a written promise issued by your bank that says: “We will pay the supplier the agreed amount, on your behalf, as soon as they present documents proving they shipped what they were supposed to.”
The key word is documents. The bank doesn't inspect your goods — it checks paperwork (bill of lading, invoice, packing list, inspection certificate) against the exact terms written into the LC. If the documents match, the supplier gets paid. If they don't, payment is held.
How does a letter of credit actually work?
An LC involves you (the buyer), your supplier, and both of your banks. Here is the typical flow.
| Step | What happens |
|---|---|
| 1. Agree terms | You and the supplier agree price, goods, and shipping terms, and that payment will be by LC |
| 2. Open the LC | You apply to your bank in Singapore to issue the LC in the supplier's favour |
| 3. Advise the supplier | Your bank sends the LC to the supplier's bank in China, which confirms it to the supplier |
| 4. Ship & document | The supplier ships the goods and gathers the exact documents the LC requires |
| 5. Present documents | The supplier's bank checks the documents and forwards them to your bank |
| 6. Payment | If documents comply, your bank pays the supplier's bank and releases documents to you so you can collect the goods |
Because Singapore is a major trade-finance hub, local banks like DBS, OCBC, and UOB handle import LCs routinely — but they will charge issuance and amendment fees, so factor those in.
LC vs T/T vs escrow: which payment method should you use?
Most China imports are paid by T/T (telegraphic transfer / bank wire). LCs and escrow are alternatives for higher-risk situations. For the full picture on each option, see our guide to paying your Chinese supplier safely.
| Method | Best for | Trade-off |
|---|---|---|
| T/T (bank wire) | Small to mid orders, trusted suppliers | Cheap and fast, but a deposit is at risk if the supplier fails to deliver |
| Letter of credit | Large or first-time orders, unfamiliar suppliers | Strong protection, but costs bank fees and is paperwork-heavy |
| Escrow / Trade Assurance | Smaller online orders via platforms | Convenient, but capped and tied to the platform |
When should a Singapore importer use a letter of credit?
An LC makes sense when the order value is high enough that losing a deposit would hurt, when you're dealing with a new supplier you haven't yet built trust with, or when your own buyer or bank requires it. It's a tool for de-risking big commitments. Before you reach that point, it helps to verify the supplier is legitimate in the first place.
When is an LC the wrong choice?
Skip the LC for small, low-value, or repeat orders with a supplier you already trust — the bank fees and document fuss outweigh the protection. The bigger risk in most China orders isn't payment fraud; it's quality. An LC guarantees documents, not product quality, so it pairs best with a pre-shipment inspection or factory audit.
Frequently asked questions
Does a letter of credit protect me against bad quality?
No. An LC only checks documents, not the goods themselves. To protect against quality problems, add a pre-shipment inspection clause and require the inspection certificate as an LC document.
How much does an LC cost in Singapore?
Banks typically charge an issuance fee (a percentage of the LC value, with a minimum) plus amendment and document-checking fees. Always ask your bank for the full fee schedule before opening one.
What's the difference between an import LC and an export LC?
It's the same instrument viewed from two sides. As the buyer importing into Singapore, you open an import LC; your supplier in China receives it as an export LC.
Can I use an LC for a small first order?
You can, but the fees often make it uneconomical below a few thousand dollars. For small first orders, a modest deposit by T/T plus an inspection is usually more practical.
What documents does an LC usually require?
Commonly: a commercial invoice, packing list, bill of lading, certificate of origin, and often a pre-shipment inspection certificate. Once goods ship, your freight forwarder prepares most of the transport documents, and if you're importing to the US you'll also want to understand import duties from China to the USA.
How Epic Sourcing helps
Epic Sourcing helps importers structure payments and manage supplier risk — from vetting and verifying factories to arranging pre-shipment inspections that pair perfectly with an LC — all part of our end-to-end sourcing service. With bilingual teams on the ground in China and Vietnam, we serve importers across the USA, Ireland, Singapore, South Africa, and the UAE. Get in touch to make your next order safer.
Related Articles
Let’s Make It Epic
We're here to make sourcing simple – and a whole lot less stressful.
