Letter of credit vs trade finance for building-material imports
If you have imported building materials for any length of time, someone has told you to use a letter of credit. It is standard advice, and for a lot of trades it is good advice. But it protects a narrower thing than most buyers assume, and the gap between what it protects and what buyers think it protects is where the expensive surprises live.
What a letter of credit actually is
A documentary credit is an undertaking by a bank to pay the seller when the seller presents a specified set of documents that comply with the terms of the credit. The current international rules are UCP 600 (ICC Publication No. 600), approved in October 2006 and in force from 1 July 2007. There has been no revision since.
Two articles do most of the work, and both are worth reading in full:
Article 4: “A credit by its nature is a separate transaction from the sale or other contract on which it may be based.”
Article 5: “Banks deal with documents and not with goods, services or performance to which the documents may relate.”
Read Article 5 again, because it is the whole point. The bank is not looking at your tiles. The bank is looking at a bill of lading, a packing list, an invoice and whatever else the credit calls for, and asking whether those pieces of paper match what the credit says. If they match, the bank pays.
UCP 600 goes further in Article 34, which disclaims bank responsibility for the form, sufficiency, accuracy, genuineness or legal effect of any document, and for the description, quantity, weight, quality, condition, packing, delivery or existence of the goods.
So what does an LC protect you from?
It is genuinely useful for:
- Non-shipment. If the seller does not ship and cannot produce a bill of lading, they do not get paid.
- Payment sequencing. Your money moves against documents rather than on trust, which is a real improvement over a wire transfer against a proforma invoice.
- Giving the seller comfort. A factory dealing with a new overseas buyer is taking a risk too. A credit from a recognised bank often unlocks better pricing or terms than a first-time buyer would otherwise get.
And what it does not protect you from
- The wrong goods. Documents can be perfectly compliant and the container can still hold the wrong specification, the wrong finish, or product that does not meet the Australian standard your certifier needs.
- Quality failures. Nothing in the credit examines the product.
- Certification gaps. Unless you specifically required a certificate as a presentable document, its absence is not a discrepancy.
- Late delivery that is still inside the shipping window. Your project schedule is not the bank’s problem.
There is one lever, and most buyers do not pull it. The documents the credit requires are yours to specify. If you require a pre-shipment inspection certificate from a named inspection company, a copy of the WaterMark Licence, an ACRS certificate, or a mill test certificate as presentable documents, then those things must exist for the seller to get paid. That converts a payment mechanism into something closer to a quality gate. It costs you nothing but the negotiation.
What an LC costs
LC pricing has two layers, and buyers routinely see only one.
The transaction fees are published. Westpac’s international services schedule (effective 1 August 2025) lists issuance of an import documentary credit at $50 electronic or $150 manual for a 12-month validity, amendments at $50 or $100, a document handling fee of 0.375% of face value with an $80 minimum and no maximum, a discrepancy fee of USD50, acceptance at 1.5% per annum, and a cancellation or unused balance fee of 0.25%. ANZ’s Australia trade tariff (October 2023) is comparable: issuance $80 electronic or $180 manual, document handling 0.375% with a $150 minimum, discrepancy $150 per presentation.
The second layer is not published: the credit risk pricing on the facility that lets the bank issue on your behalf. That is negotiated per customer and it is usually the larger number. Any comparison that only counts the transaction fees is understating the cost.
There is also a balance sheet cost that does not appear as a fee at all — an LC generally consumes a limit with your bank, and that limit is then unavailable for anything else.
How trade or procurement finance is different
| Letter of credit | Trade / procurement finance | |
|---|---|---|
| Who pays the factory | Your bank, against documents | The financier, directly |
| What is examined | Documents | Depends on the provider — some also assess the factory and can arrange inspection |
| Your cash position | Facility limit consumed at issuance | Repayment falls due on agreed terms after the goods move |
| Typical entry requirement | Bank facility, often with security | Varies widely by provider |
| Cost visibility | Published fees plus unpublished credit pricing | Ask for the all-in dollar cost on a sample order |
Neither is better in the abstract. An LC is a strong tool when the seller needs certainty of payment and you are confident about specification. A finance facility that also assesses the factory and can put an inspection between production and payment addresses a different risk — not whether the documents are right, but whether the goods are.
A practical position
Most experienced importers end up doing one of two things:
- Use an LC, and specify inspection and certification documents as presentable documents. This is the low-cost improvement that most buyers skip.
- Use a facility that puts assessment and inspection in the path of the payment, so the check happens before the money moves rather than after the documents arrive.
What does not work is assuming that because the payment mechanism is formal, the goods have been checked. Under UCP 600, they have not been. The rules say so in one sentence.
This article is general information only and is not legal, financial or professional advice. Bank fees quoted are from the published schedules referenced and are current at the time of writing; confirm current pricing with your bank. Linkwox’s factory assessment and inspection are advisory services provided for information only; they are not a warranty of the goods, a guarantee of factory performance, or a condition of your obligations to Linkwox.
