Letters of Credit, Explained: How Small Importers Use Confirmed and Standby LCs to Pay Overseas Suppliers

Your new supplier in Vietnam wants 30 percent up front by wire transfer, before a single carton leaves the factory. If the shipment never arrives — or arrives as the wrong goods — that deposit is sitting in a foreign bank account, and your leverage is a polite email thread. You could refuse and lose the supplier, or you could pay and hope. A letter of credit gives you a third option: your bank promises the supplier it will be paid, but only after it proves it shipped exactly what you ordered.

That promise comes in two shapes that matter to a small importer. A commercial (documentary) letter of credit is the payment method itself: the bank pays the supplier against shipping documents. A standby letter of credit is a safety net behind some other payment method: it pays only if you fail to pay. Add the confirmed vs. unconfirmed choice — whether a second bank in the supplier's country adds its own payment promise — and you have the three decisions that determine what an LC costs you and how much protection you actually get.

How a Commercial Letter of Credit Works From the Buyer's Seat​

Most LC explainers are written for exporters. Here is the same transaction from your side of the table:

1. You and the supplier sign a sales agreement that names the letter of credit as the payment method, including the type, the expiry date, and which documents the supplier must present (commercial invoice, bill of lading, packing list, certificate of origin, and any inspection certificate).
2. You apply to your bank — the issuing bank — to open the credit in the supplier's favor. The bank underwrites you much like a short-term loan: it reviews your financials, your credit line, and usually asks for collateral or a cash margin of 10 to 30 percent of the credit amount.
3. Your bank issues the LC and transmits it to a bank in the supplier's country (the advising bank), which notifies the supplier. If that second bank also adds its payment promise, the credit is confirmed.
4. The supplier ships and presents documents to its bank, which checks them against the LC terms and forwards complying documents to your bank.
5. Your bank pays (or accepts a time draft for later payment), debits your account, and hands you the documents — including the bill of lading you need to claim the goods and clear customs.

Notice what the bank is checking: documents, not goods. Under the international rules that govern nearly every LC (the ICC's UCP 600), banks deal in paperwork. If the documents comply, the bank pays even if the container holds bricks. That is why the documents you require — especially an independent inspection certificate — are where your real protection lives.

Confirmed vs. Unconfirmed: Whose Promise Is Your Supplier Relying On?​

In an unconfirmed credit, only your bank promises to pay. The advising bank in the supplier's country merely passes the message along. That is cheaper, and it is usually enough when your bank is a large institution the supplier's bank knows and trusts.

In a confirmed credit, the advising bank adds its own independent promise to pay against complying documents. Your supplier now has two banks on the hook instead of one, and — critically — one of them is local. Confirmation protects the supplier against three risks that have nothing to do with your creditworthiness:

• Your bank fails or freezes payments.
• Your country imposes exchange controls or sanctions that block the transfer.
• Politics intervenes — war, civil unrest, or a sudden freeze on outward payments.

Confirmation is the supplier's protection, but you usually pay for it, either directly or because the supplier prices it into the deal. Expect a confirmation fee on the order of 0.1 to 0.5 percent of the credit amount per quarter it is outstanding, on top of the issuance fee your own bank charges (commonly 0.5 to 2 percent of the transaction value, often with a minimum of a few hundred dollars).

When to accept — or insist on — confirmation​

• Your supplier demands it. Suppliers in countries with volatile currencies or fragile banking systems routinely require confirmed credits. Treat it as a cost of doing business there, and negotiate the order size so the fixed fees spread sensibly.
• Your bank is small or unknown abroad. If your issuing bank has no correspondent relationship the supplier's bank recognizes, confirmation converts an unfamiliar promise into a local one and can unblock the deal.
• The tenor is long. A usance credit payable 90 or 180 days after shipment leaves the supplier exposed to your country's risk for months. Confirmation is priced per period precisely because time is risk.
• Skip it when the relationship and the route are boring. A repeat supplier, a stable country pair, payment at sight: an unconfirmed credit saves real money for protection you are unlikely to need.

The Standby LC: A Guarantee That Stays in Its Holster​

A standby letter of credit (SBLC) works nothing like the commercial credit above. Nobody expects it to be drawn. You and the supplier agree on a normal payment method — open account, net 30, a series of wires — and the standby sits behind it as a guarantee: if you fail to pay, the supplier presents a simple demand plus a statement that you defaulted, and the bank pays.

Think of it this way:

For a small importer, the standby shines in two situations. First, repeat suppliers who will sell on open account but want security: the standby replaces the per-shipment paperwork of a commercial credit with one annual instrument, and each shipment flows on normal invoices. Second, contracts beyond goods — a lease on overseas warehouse space, a performance obligation to a foreign distributor — where there are no shipping documents at all and a commercial LC cannot function.

The danger of a standby is its simplicity. Because drawing requires little more than the supplier's say-so that you defaulted, a standby is only as safe as the underlying contract's definition of default. Keep the face amount tied to one shipment cycle rather than the whole annual volume, set a short expiry with renewal terms, and make sure your sales agreement — not the bank's one-page form — defines what "failure to pay" means.

What the Whole Thing Costs: A Worked Example​

Take a $60,000 order of components from a first-time supplier, shipped by sea, payable at sight under a confirmed credit:

• Issuance fee (your bank): 1 percent with a $350 minimum → $600
• Advising fee (supplier's bank): flat → ~$150
• Confirmation fee: 0.25 percent per quarter, outstanding one quarter → $150
• Negotiation and document-checking fees: ~$200
• Amendment (you will need at least one): ~$150
• Cash margin: 20 percent of face value → $12,000 of your working capital parked at the bank until documents arrive

Total friction: roughly $1,250 in fees — about 2 percent of the order — plus the opportunity cost of the margin. On a $15,000 order the flat fees barely shrink, which is why credits under about $20,000 to $25,000 often cost more protection than they are worth; for small first orders, an escrow service or a 30/70 wire split with inspection before the balance is usually the rational choice.

A standby covering the same $60,000 relationship at 1.5 percent per year costs about $900 annually and covers every shipment that year — the per-shipment cost collapses once volume flows. That crossover is the real decision: one-off or first order, commercial credit; ongoing relationship, standby behind open account.

The Discrepancy Trap — and Why It Bites Importers Too​

Industry surveys repeatedly find that around 70 percent of first presentations under letters of credit contain discrepancies — a misspelled name, an invoice total a dollar off the credit amount, a bill of lading dated after the latest shipment date, conflicting port names between documents. When documents are discrepant, the bank may refuse to pay until the problems are fixed, and each round of fixes costs amendment fees and days.

Exporters feel this as delayed payment. You feel it as delayed documents — and without the bill of lading, your goods sit at the port running up demurrage while the paperwork gets cured. Three importer-side defenses:

1. Keep the document list short. Every required document is another chance to disagree. If you do not need a certificate of origin for duty purposes, do not require one.
2. Write tolerances into the credit. UCP 600 allows a 5 percent quantity tolerance by default when the credit does not prohibit partial shipments; mirror that flexibility in the invoice amount so a $40 rounding difference does not stall a $60,000 shipment.
3. Approve draft documents before shipment. Ask the supplier to email scans of the invoice, packing list, and draft bill of lading before the vessel sails. Errors caught on a PDF cost nothing; errors caught at the negotiating bank cost a week.

How to Book a Letter of Credit in Your Own Records​

LCs confuse bookkeepers because the credit itself is not a purchase — it is a contingent commitment. The practical treatment for a small business:

• Opening the credit: no entry for the credit itself. Record the cash margin as a transfer, not an expense — debit a bank-margin or restricted-cash account, credit your operating account. Disclose the open credit as a contingent commitment in your notes if your statements go to a lender.
• Bank fees: expense them as incurred — debit bank charges or LC fees, credit cash. Issuance, advising, confirmation, and amendment fees are period costs, not part of inventory.
• Documents arrive and the bank pays: now you have the purchase — debit inventory (or purchases) for the goods value, debit bank charges for any final negotiation fees, credit cash or your bank loan for what the bank debited.
• Standby fees: the annual fee is a financing cost — debit bank charges or guarantee fees, typically amortized monthly across the standby's life.

If you use plain-text accounting, the margin transfer and the fee expenses are ordinary postings; the open credit itself can live as a dated note or a zero-balance tracking account so your month-end review shows commitments alongside liabilities. The habit that matters is reconciling the margin account every month — unreleased margins from long-closed credits are dead cash, and banks do not always release them promptly.

A Practical Checklist Before You Open Your First Credit​

• Price the all-in cost — fees plus margin drag — against the order size. Under ~$20,000, prefer escrow or split wires with pre-shipment inspection.
• Negotiate the document list with the supplier before you apply; changing it later means amendment fees.
• Confirm your bank will issue to the supplier's country and bank before promising an LC in the sales agreement.
• Decide on confirmation deliberately — default to unconfirmed for stable routes and repeat partners, confirmed for new corridors and long tenors.
• For repeat volume, get a standby quote too — one annual fee behind open-account terms usually beats per-shipment commercial credits by the third order.
• Set calendar reminders for the latest shipment date, the document presentation period (usually 21 days after shipment under UCP 600), and the credit expiry. Missed dates are the most common discrepancies and the easiest to prevent.

Simplify Your Trade Finance Record-Keeping​

Paying overseas suppliers through confirmed or standby credits adds moving parts — margins parked at the bank, fees hitting across months, contingent commitments your lender wants to see. Clear records turn that complexity into routine: every fee expensed, every margin tracked until release. Beancount.io offers plain-text accounting that's transparent, version-controlled, and AI-ready — your trade finance trail stays searchable and auditable instead of buried in bank portals. Get started for free and see why developers and finance professionals are switching to plain-text accounting.