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Letter of credit
A documentary credit is a promise by your bank to pay the seller's bank when a named set of documents is presented exactly as the credit specifies. It moves the argument from the goods to the paperwork, which is a real improvement and the source of every complaint about it.
The essentials.
- The banks deal in documents
- A bank checks whether the presentation matches the credit. It does not inspect goods, visit a factory or form a view about quality.
- Exactly means exactly
- A discrepancy as small as a spelling difference between documents can justify refusal. Drafting the credit carefully is most of the work.
- It costs money at both ends
- Issuance, advising, amendment and discrepancy fees. On a small order the total can approach the value of the protection.
- Amendments need both sides
- Changing a credit after issue requires agreement, which is why an unrealistic requirement written into it becomes a negotiation later.
Who asks for it.
This travels with the goods wherever they go. Either Indonesia requires it on the way out, or it is an ordinary trade document that any buyer, bank and carrier expects to see.
What it does not cover.
It does not inspect your goods
A perfectly compliant presentation gets paid even if the container is wrong. The document that addresses that is an inspection certificate, and it only helps if the credit requires one from a party you chose.
It does not make a bad supplier safe
Documents can be produced for goods that do not match. A credit reduces the risk of paying against nothing and does very little about paying against the wrong thing.
It is not free and it is not fast
For a small first order the money is often better spent on a pre-shipment inspection, which addresses the risk buyers actually meet.
Questions buyers ask.
Should I use one on a first Indonesian order?
Sometimes, and less often than buyers assume. It protects against paying for a shipment that never happened. It does not protect against goods that are not what you ordered, which is the more common problem. On a small order a pre-shipment inspection buys more safety per dollar.
What makes a credit go wrong?
Discrepancies, almost always. A date, a description or a document that does not match the credit exactly, and the bank is entitled to refuse. The fix is drafting requirements the seller can actually meet and checking the presentation before it goes to the bank.
Can I require an inspection certificate in the credit?
Yes, and it is one of the more useful things you can do with a credit. Name the inspection body and what the certificate has to state. A certificate issued by the seller proves considerably less than one from a party you appointed.
Where this comes up.
Paying an Indonesian supplier
T/T, letters of credit and documentary collection, what each actually protects, and the five rules that stop a deposit disappearing.
Incoterms for Indonesian shipments
Almost every quotation out of Indonesia says FOB. For a container that is the wrong rule, and the body that writes the rules says so.
Need this document for a real shipment?
Tell us the product and the destination port. We come back with the full document set for that route, who issues each one, and how long it takes.