Although letters of credit can be useful, it's often best to avoid using one for a transaction. They can sometimes result in expensive delays, bureaucracy and unexpected costs. As a general rule you should probably only consider opening a letter of credit as an importer if:

your supplier insists on it

 national exchange controls require it

Exporters - deciding whether to ask for a letter of credit

Think carefully about whether or not you need to ask an overseas customer for a letter of credit. Some important things to consider include:

Legal matters - does the country you're exporting to require one?

 Costs - does the value of the order justify the bank charges and extra costs involved, and who pays these costs?

The customer's creditworthiness - do they have a track record with you?

Risks associated with the country you're exporting to - is it politically stable with a good reputation as an international trading partner?

 Normal trading practices - is it standard practice for exporters to use letters of credit when trading with that country, and/or in that particular commodity?

Available advice and guidance - banks may recommend using of a letter of credit in certain trading situations regardless of other factors, while credit insurers sometimes insist on it.

Give some thought to alternative arrangements, such as credit insurance, export factoring or cash in advance terms.

If you do decide that a letter of credit is the best option you'll need to consider which type of letter to use. A 'confirmed and irrevocable' letter of credit is the most secure type.

It's wise to have a clear policy in your business about when to consider using a letter of credit. Reviewing your policy on a regular basis will help you avoid using them unnecessarily and possibly putting off would-be customers.