Importer disadvantages of LC (letter of Credit)

Demerits of Letter of Credit to Importer.

Business world operates letter of credit based on the rules of uniform customs and practise of documentary credit under notification 600, which was approved on July 1, 2007 with a revision of UCP 500 that had previously been followed.


Are there any disadvantages to running an LC? What are the drawbacks of a letter of credit for buyers? Let us address the disadvantages of LC from the standpoint of importers.


A letter of credit (LC) is a document issued by a bank at the request of an importer that guarantees payment to an exporter for goods or services provided. LCs are a popular payment mechanism in international trade, although they have significant drawbacks for importers.

Here are some of the most significant disadvantages of LCs for importers:


Cost: Because the importer's bank charges a fee for the service, LCs can be costly to issue. For large or sophisticated transactions, this cost can be significant.


Time: It can take some time to process an LC transaction, which can cause products to be delayed. This can be an issue for importers who require items rapidly.


Documentary requirements: LCs often have stringent documentary requirements that can be time-consuming and difficult to complete. Importers who are unfamiliar with the process may find this difficult.

The possibility of fraud exists despite the fact that LCs are a generally secure payment option. If the exporter or their bank fails, the importer's bank may be unable to collect funds.

Currency fluctuations may result in a loss for the importer if the exchange rate between the importer's currency and the currency of the LC varies between the time the LC is granted and the time the items are dispatched.



Overall, LCs can be a useful tool for importers, but there are certain drawbacks to consider. Before selecting whether or not to employ LCs for a certain transaction, it is critical to assess the pros and drawbacks.

Here are some extra pointers for importers thinking about adopting LCs:


Look around for the greatest price: The cost of issuing an LC varies depending on the bank. Before selecting a bank, it is critical to browse around and compare rates.

Be specific about your requirements: The provisions of the LC should be adapted to the importer's unique requirements. The importer should, for example, describe the currency in which payment will be made, the papers that must be presented with the claim, and the time frame for submitting the claim.

Examine the documents thoroughly: Before receiving an LC, the importer should carefully analyse the documents to ensure that they match their requirements and are error-free.

Be careful of the dangers: Although LCs are a relatively safe payment option, fraud is still a possibility. The importer should be aware of the dangers and take precautions to reduce them.

 Importer disadvantages of LC (letter of Credit)

One of the biggest disadvantages of a letter of credit is that it is based on documentation rather than direct verification of products.Letter of credit (LC) disadvantages for exporter copy quality, quantity, or other characteristics. In other words, an LC issuing bank can make payments to LC beneficiaries based on paperwork submitted in accordance with the terms and conditions of the letter of credit. The parties to a letter of credit have no right to physically inspect the contents of the items. So, if the customer has to confirm and satisfy himself about the quality of the things he is purchasing, He can choose a globally reputed inspection agency and tell the exporter to attach a certificate of such inspection by specifying a condition in the letter of credit.

Once a confirmed and irrevocable letter of credit is opened, the importer/buyer is locked into the specified business credit limit and cannot alter. If a buyer has to cancel his export order for any reason, including a change in the selling price, he cannot do so.

When compared to other payment modes, the cost of operating letter of credit procedures and formalities is higher, which may result in additional charges for an importer, particularly on amendment, negotiation, and so on.


Another downside of Letters of credit is currency fluctuation. Typically, the buyer/importer makes purchase orders once a year and opens a letter of credit in response. The currency rate may change at the time of payment. As a result, any loss caused by changes in foreign currency contracted by letter of credit must be borne by him. This is also one of the key disadvantages of LC.

Currency fluctuations may also have an impact on pricing changes in the local market. The demand for imported items may be reduced as a result of currency fluctuations. As a result, currency fluctuation is a risk under a letter of credit, and it is viewed as one of the letter of credit's downsides.