Are letters of credit common in U.S. imports?

Less common than open account terms, but still used significantly in new supplier relationships, high-value transactions, and trade with countries where payment risk is elevated.

How much does a letter of credit cost?

Bank fees for issuing an LC typically range from 0.75% to 1.5% of the LC value, plus amendment and negotiation fees. The cost varies by bank, transaction size, and country risk.

Trade Finance

What is Letter of Credit?

A bank-issued guarantee of payment to the seller upon presentation of specified trade documents, reducing buyer default risk. In the context of U.S. customs and tariff recovery, understanding letter of credit is essential for navigating the CAPE refund process and ensuring accurate duty assessment.

Definition

A letter of credit (LC, also called documentary credit) is a financial instrument issued by a bank guaranteeing that a seller will receive payment upon presenting specified documents proving that goods have been shipped as agreed. LCs reduce risk for both parties: the seller is assured of payment; the buyer knows the bank will only pay when the seller meets the documentary requirements. LCs are governed by the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the ICC. Common types include sight LC (payment upon document presentation), usance LC (payment after a specified period), and standby LC (backup guarantee).

How Letter of Credit Relates to Tariff Refunds

Letters of credit are a trade finance mechanism, not a customs document. They do not directly affect duty assessment or CAPE refund eligibility. However, the LC terms may reference the Incoterm (FOB, CIF, etc.), which affects customs valuation and therefore the duty amount subject to potential refund.

Example

An importer opens a $500,000 sight LC at their bank in favor of a Chinese supplier. When the supplier presents the bill of lading, commercial invoice, and packing list to their bank, payment is released. The goods arrive in the U.S. and the broker files an entry assessing $125,000 in Section 301 duties.

Frequently Asked Questions

Are letters of credit common in U.S. imports?: Less common than open account terms, but still used significantly in new supplier relationships, high-value transactions, and trade with countries where payment risk is elevated.
How much does a letter of credit cost?: Bank fees for issuing an LC typically range from 0.75% to 1.5% of the LC value, plus amendment and negotiation fees. The cost varies by bank, transaction size, and country risk.

Legal References

UCP 600 — Uniform Customs and Practice for Documentary Credits
UCC Article 5 — Letters of Credit

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