A letter of credit substitutes a bank’s undertaking for the buyer’s, giving the seller a payment obligation that does not depend on the buyer’s willingness. The cost is real: bank charges, strict documentary compliance, and the fact that a trivial discrepancy in a document can hold up payment on goods that arrived perfectly.
Open account is cheaper and faster and pushes the risk entirely onto the seller. Between the two sit collections, standby credits and various forms of credit insurance. The right answer usually tracks the age of the relationship and the size of the exposure — and it should be revisited as both change, rather than inherited from the first shipment and never questioned again.
Harbour Strategies (HK) Limited · 20 February 2024
Editorial commentary by Harbour Strategies. Figures and regulatory details should be verified against primary sources before being relied upon.
