Letter Of Credit

A Letter of Credit (LC) is a bank-issued payment undertaking in which the buyer's bank promises to pay the seller once the LC's required terms and documents are met. In manufacturing supply chains, payment is triggered by documentary compliance, not by the physical condition of the goods alone, reducing counterparty risk when buying imported raw materials, components, or capital equipment from less-trusted suppliers.

In practice, the LC governs the entire inbound flow for imported materials. Purchasing issues a PO tied to contract terms, the bank opens the LC, and the supplier ships against required documents such as the invoice, packing list, bill of lading, and certificate of origin. Receiving and finance can only release payment and title documents after the bank verifies compliance. This creates a document-control checkpoint before goods clear customs or are booked into inventory. If the shipping documents do not exactly match the LC, the shipment can be delayed at port, held in transit, or prevented from entering usable stock even though the physical material has arrived. For materials planning, the LC matters most when lead times are long, suppliers are overseas, and failure costs are high, because it supports continuity of supply by making payment conditional on contractually defined milestones rather than informal trust.

• ⚠️Document mismatch stalls inbound material: If the bill of lading, packing list, invoice, or origin certificate does not match LC wording exactly, the bank rejects the presentation, delaying payment and leaving raw material stuck outside inventory until corrections are made.
• ⚠️Rigid terms clash with real logistics: A slight difference in ship date, partial shipment, or document formatting makes the LC non-compliant, so the supplier may not get paid on time even though material is en route, straining vendor relationships.
• ⚠️LC masks quality gaps: An LC only verifies paperwork, not material specification, so nonconforming coils, resins, castings, or parts can pass the LC and still fail inspection, creating quarantine, rework, or line stoppage risk.