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# How to Pay a Chinese Supplier With a Letter of Credit
- URL: https://blog.financely.io/how-to-pay-a-chinese-supplier-with-a-letter-of-credit/
- Published: 2026-11-14T21:12:35.000Z
- Updated: 2026-11-14T21:12:35.000Z
- Description: Many importers pay Chinese factories with a wired deposit before production and the balance before shipment. That works until a supplier ships late, ships the wrong goods or disappears with the deposit. A documentary letter of credit (LC) changes the order of events: your bank.
- Author: Financely Debt Advisors
- Tags: Letters of Credit, Documentary Letters of Credit, Trade Finance

Many importers pay Chinese factories with a wired deposit before production and the balance before shipment. That works until a supplier ships late, ships the wrong goods or disappears with the deposit. A documentary letter of credit (LC) changes the order of events: your bank pays only when the supplier presents shipping and inspection documents that match the credit. This guide shows how to set that up.

**Short answer:** verify the supplier, put LC payment terms in the purchase contract, agree the documents (including third-party inspection), have your bank issue the LC to the supplier's bank in China, and release payment only against complying documents.

## Why LCs work for China sourcing

The US International Trade Administration notes that most Chinese commercial banks have authority to issue letters of credit for both imports and exports, and that China, as an ICC member, is subject to UCP 600\. Your supplier's bank is likely to know the instrument. The question is whether the supplier will accept it on your terms.

## Step-by-step: paying a Chinese supplier by LC

1. ### Verify the supplier before you talk about payment  
Check the business license, the exporting entity, the factory address and whether the bank account in the pro forma invoice belongs to the same company. A mismatch between the selling entity and the account holder is a red flag. Our guide on [how to verify a supplier](https://blog.financely.io/how-to-verify-a-commodity-supplier/) sets out the checks.
2. ### Replace the deposit request with LC terms  
Propose the LC in the purchase contract, not after the pro forma invoice arrives. If the supplier insists on some advance, negotiate a smaller deposit with the balance under the LC. If they refuse open account and deposits are too large, see [financing options when a supplier refuses open account terms](https://blog.financely.io/supplier-refuses-open-account-terms-financing-options/).
3. ### Choose sight or usance and the Incoterms rule  
A sight LC pays when documents comply. A usance LC pays later, which gives you time to sell the goods. FOB Chinese port and CIF or CFR destination port are common choices. The Incoterms rule decides who books freight and insurance, and therefore which documents the supplier presents.
4. ### Define the documents, including inspection  
Typical documents are the commercial invoice, packing list, full set of bills of lading, certificate of origin and an inspection certificate from an independent company you nominate. Inspection is your main protection on quality because banks examine documents, not goods. See [inspection certificates under a letter of credit](https://blog.financely.io/inspection-certificate-documentary-letter-of-credit/).
5. ### Open the LC through your bank  
Submit the application with the supplier's exact legal name, address, bank and SWIFT code. Send the draft to the supplier for comment first. Our [documentary letter of credit process guide](https://blog.financely.io/documentary-letter-of-credit-process-step-by-step/) covers the bank side.
6. ### Monitor production and shipment  
Track the latest shipment date in the LC against the factory schedule. If production slips, agree an amendment before the date passes. Book the inspection early, as inspectors need access before loading.
7. ### Check documents and release payment  
The supplier presents documents through its bank. Your bank examines them against the credit. If there are discrepancies, you decide whether to waive them. Read our [discrepancy review checklist](https://blog.financely.io/letter-of-credit-discrepancy-review-checklist/) before you agree.

## Payment methods compared

| Method                          | When you pay                                 | Your protection                                     | Supplier's view                          |
| ------------------------------- | -------------------------------------------- | --------------------------------------------------- | ---------------------------------------- |
| Wired deposit and balance (T/T) | Before production and before shipment        | Low: relies on supplier performance                 | Preferred by many factories              |
| Documentary collection (D/P)    | When you take up the shipping documents      | Medium: no bank payment undertaking to the supplier | Acceptable to some suppliers             |
| Sight LC                        | When complying documents are presented       | Higher: payment tied to documents and inspection    | Widely understood, more paperwork        |
| Usance LC                       | At a set date after shipment or presentation | Higher, plus time to sell before paying             | Accepted if the supplier can discount it |
| Deposit plus LC balance         | Part before, part against documents          | Mixed: the deposit is unsecured                     | Common compromise                        |

## Currency, charges and timing to agree up front

Decide the LC currency in the contract. Many Chinese exporters invoice in US dollars, and some accept renminbi. Whatever you choose, the LC amount, the invoice and the contract must use the same currency. State who pays which bank charges, and whether the supplier may draw a small tolerance above the LC amount if the shipped quantity varies. Under UCP 600 article 30(a), the words "about" or "approximately" used in connection with the amount, quantity or unit price allow a tolerance of not more than 10% more or 10% less than the figure they refer to. Use those words deliberately or not at all. Separately, article 30(b) allows a quantity tolerance of not more than 5% more or 5% less when the credit does not state the quantity in packing units or individual items, provided the amount drawn does not exceed the credit amount.

Set the presentation period as well. If the LC is silent, UCP 600 article 14(c) requires a presentation that includes one or more original transport documents to be made no later than 21 calendar days after the date of shipment, and in any event not later than the expiry date. A short period with a slow courier route can make the documents late, so agree a realistic window with the supplier.

## Mistakes to avoid

- Letting the supplier write the LC document list.
- Accepting an inspection certificate issued by the supplier itself.
- Leaving the beneficiary name different from the contract seller.
- Setting a shipment date the factory cannot meet, which forces amendments.
- Paying a large deposit to a supplier you have not verified.

## If your bank line is too small

Growing importers often find their bank will not issue LCs for the size or number of orders they now place. Options include a larger trade line, a [usance LC](https://www.financely.io/usance-letter-of-credit?ref=blog.financely.io) or [UPAS LC](https://blog.financely.io/how-upas-letters-of-credit-help-importers-extend-payment-terms/) structure, or a supplier payment facility secured on the goods and the resale. Financely works on these as an advisor and arranger. Approval sits with the bank or financier.

## Frequently Asked Questions

### Do Chinese suppliers accept letters of credit?

Many do, especially manufacturers used to export orders. Chinese commercial banks issue and advise letters of credit, and China is subject to UCP 600\. Smaller suppliers may prefer a deposit and balance payment, so negotiate LC terms early, in the purchase contract. A smaller deposit with the balance under the LC is a common compromise.

### Is a letter of credit safer than paying a deposit by wire?

A letter of credit means payment is released only against documents that match the credit, such as a bill of lading and inspection certificate. A wired deposit is paid before anything ships. The LC does not guarantee goods quality, so inspection terms still matter.

### Who pays the bank charges on an LC to China?

The contract should say. A common split is that each party pays its own bank charges, with confirmation, if requested by the supplier, paid by the supplier. Agree it in writing before issuance, together with any tolerance the supplier may draw above the LC amount if the shipped quantity varies.

### Can I use a usance LC to get payment terms from a Chinese supplier?

Yes. A usance LC lets the supplier be paid at a future date while still holding a bank undertaking, and the supplier can often discount it with its own bank. It gives you time to sell the goods before you pay. Your bank must approve the longer exposure.

### What if the supplier asks for a deposit plus an LC?

That is common. A partial advance with the balance under an LC can work, but treat the deposit as unsecured. Keep it small, verify the supplier, and consider whether an advance payment guarantee from the supplier's bank is available. The balance is still paid only against complying documents.

**Buying from a Chinese manufacturer and need the payment structured?**

See how Financely structures this on [Supplier Payment Financing for Importers](https://www.financely.io/supplier-payment-financing-for-importers?ref=blog.financely.io), or send the file for review.

[Submit your transaction](https://www.financely.io/deal-submission?ref=blog.financely.io)

*Financely is an advisor and arranger. It does not lend, issue letters of credit or take title to goods, and no financing outcome is promised. Any facility depends on the credit approval of the bank or financier. This guide is general information, not legal, tax or regulatory advice.*

Sources and references (checked 14 November 2026)

1. [International Trade Administration, China Country Commercial Guide: Trade Financing](https://www.trade.gov/country-commercial-guides/china-trade-financing?ref=blog.financely.io)
2. [International Trade Administration, Letter of Credit](https://www.trade.gov/letter-credit?ref=blog.financely.io)
3. [International Chamber of Commerce, Incoterms rules](https://iccwbo.org/business-solutions/incoterms-rules/?ref=blog.financely.io)
4. [ICC Academy, An overview of UCP 600 and ISP98 (UCP 600 articles 14(b) and 14(c))](https://academy.iccwbo.org/trade-finance/article/an-overview-of-ucp-600-and-isp98/?ref=blog.financely.io)
5. International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits (UCP 600), articles 30(a) and 30(b)