A letter of credit is a bank's promise to pay a seller once matching documents are presented, and it was built for large trades between parties who cannot check each other. On small and mid-size orders it is slow, expensive, and misdirected: it verifies paperwork, not the goods in the container. This guide explains what an LC is, what the fees and collateral really run to, and where its protection stops. It then describes a milestone-gated alternative: fund the whole order once, release each tranche only against evidence you chose, such as a signed purchase order, an inspection report, and a bill of lading. Tranchio is the layer that gates and records each release; the licensed payment provider moves the funds, and that goes live at launch.
If your bank quoted you a few thousand dollars and three weeks of paperwork to open a letter of credit on a US$60,000 order, the instrument was not built for you. Letters of credit were designed for large trades between strangers, and most of their cost and delay comes from that design. There is a way to pay a factory safely on smaller orders without any of it, and it is worth understanding why before you reach for the LC out of habit.
What a letter of credit actually is
A letter of credit is a promise from your bank to pay the seller a fixed amount once the seller presents a specific set of documents that match the terms exactly. The bill of lading, the commercial invoice, the packing list, the certificate of origin: each has to say precisely what the credit says it should. If the documents match, the bank pays. If your goods are wrong but the documents are right, the bank still pays.
That last point is the one importers miss. The bank never sees the cargo. It checks paper against paper. An LC substitutes your bank's creditworthiness for your own, which is genuinely useful when a factory in one country has no way to judge a buyer in another. It does nothing to confirm that the pallets hold what the invoice claims.
What it costs, and why it is slow
The headline is the issuance fee, usually somewhere between 0.75% and 1.5% of the order value, with a floor that bites hard on small amounts. A US$50,000 LC can carry a minimum fee that works out well above 1.5% once you add it up. Then come the extras: amendment fees every time a shipping date or quantity changes, the advising bank's charge on the seller's side, confirmation fees if the seller wants a second bank to guarantee payment, and courier costs for original documents.
The larger cost is collateral. Your bank is promising to pay, so it wants security. Unless you have an established trade line, that often means posting cash or tying up part of a facility for the life of the credit. On a US$60,000 order you might have US$60,000 frozen for two or three months.
Slowness is built in for the same reason. Every term is negotiated between two banks before anything ships, and any change means an amendment that both sides re-approve. Banks staff LC desks to be careful, not fast. Small discrepancies in the documents, a misspelled company name, a date a day out, let the bank refuse or delay payment until they are fixed, which is where a lot of the friction lands on the seller and comes back to you as a stalled shipment.
Why it is usually overkill under US$100,000
The instrument earns its cost when the sums are large enough that a bank guarantee is the only thing that makes two strangers transact. Below roughly US$100,000, the fees, the frozen collateral, and the weeks of setup rarely pay for the protection you get, especially since that protection was never pointed at your real risk.
Your real risk on a factory order is not that a solvent counterparty refuses to pay. It is that you send money and receive the wrong goods, late goods, or no goods. An LC is aimed at the first problem. You have the second.
What an LC protects, and what it does not
It protects the seller against a buyer who will not pay, and it protects you against paying for a shipment that was never made, since no documents means no payment. Within its own terms it is reliable.
It does not check quality. It does not check quantity beyond what the paperwork states. It does not hold anyone to an inspection standard unless you name an inspection certificate as a required document, and even then the bank only checks that the certificate exists and matches wording, not that the inspection was real or that the goods passed. The bill of lading proves a container was loaded and shipped. It says nothing about what is inside. This is the same gap that makes 30/70 wire terms risky, which is covered in how to pay a Chinese supplier safely.
The milestone-gated alternative
The alternative keeps the one thing an LC gets right, payment against evidence, and drops the bank machinery around it. You structure the order into milestones and decide, up front, what evidence releases each one.
Here is the shape of it. You commit the full order value once, so the factory can see the whole amount is real before cutting anything. The money is then released in tranches, each one gated by a document you chose: the signed purchase order, a third-party pre-shipment inspection report, the bill of lading. A tranche moves only when its evidence is in and you approve it. If the inspection fails, that release does not happen.
The difference from an LC is what triggers the money. You are not limited to documents a bank will accept and check for spelling. You can require an inspection report from an agency you appointed and gate your largest payment on it passing. That points the protection at the goods, not just the paperwork.
What to ask for
- The full order funded up front, so the factory sees a committed amount rather than a 30% deposit and a promise.
- Release tied to evidence you name: signed PO, pre-shipment inspection report, bill of lading, in whatever order fits the build.
- A third-party inspection as the gate on your biggest tranche, not a self-declaration from the factory.
- A tamper-evident record of what was released, when, and against which document, so there is no argument later about what was agreed.
Where Tranchio fits, honestly
Tranchio structures a cross-border order this way. It is the control-and-record layer: it gates each tranche against the evidence you set and keeps a tamper-evident record of every release. It is not a bank and not an escrow agent, and it never takes custody of your money. Payment execution is handled by a licensed payment provider, and that goes live at launch. Tranchio is pre-launch and invite-only right now.
For the buyer, the fee is 1.5% of the order with a new seller, dropping to 0.9% once you have completed US$50,000 with that seller. The seller pays nothing and receives every tranche in full. You can see the full breakdown on the pricing page, read how the record is kept on the security page, and see how this works on a live route on the Hong Kong to China corridor. If a letter of credit has been pricing you out of safe terms, milestone-gated release is the plainer instrument for orders this size.