Letter of credit vs documentary collection: which one should an importer use?

Your new supplier in Ningbo or Ho Chi Minh City has sent a pro forma invoice, and the payment terms say “L/C at sight”. You were hoping to wire a deposit and the balance, as you do with your regular factory. Before you agree, it helps to know that there’s a middle option, the documentary collection, and that the two work very differently on cost, risk and the cash you need on hand.

Here’s how the two sit side by side on the shelf.

What each one is (and what it’s also called)

Letter of credit. Also called a documentary credit, documentary letter of credit, LC or L/C. Your bank (the issuing bank) promises the supplier it will pay, provided the supplier presents the exact documents the credit lists, within its dates. The bank’s promise replaces your credit risk with the bank’s. Letters of credit run under the International Chamber of Commerce rules known as UCP 600.

Documentary collection. Also called a documentary bill, a bill for collection, or by its two flavours, D/P and D/A. The supplier ships, then hands the shipping documents to its bank, which sends them to your bank with instructions. Your bank releases them to you only when you either:

• pay the bill: documents against payment (D/P, sometimes “cash against documents”), or
• accept a bill of exchange promising to pay on a set date, such as 60 days after sight: documents against acceptance (D/A).

Collections run under a separate ICC rulebook, URC 522. The crucial line in it: the banks act as agents. They handle documents and money, but neither bank promises to pay anyone. NAB’s documentary trade page describes collections as a “middle ground” between open account trading and letters of credit, which is a fair summary.

Letter of credit vs documentary collection, side by side

	Letter of credit	Documentary collection
Who promises payment	Your bank	Nobody: banks only pass documents
Rules	ICC UCP 600	ICC URC 522
Supplier’s risk	Low, if documents comply	Higher: you might not pay or accept
Your risk	Paying for documents, not goods	Same, but you see documents before paying
Bank checks the documents?	Yes, against every term of the credit	Only that the listed documents are there
Uses a bank limit?	Yes, usually needs a trade facility	D/P: no. D/A: sometimes, if the bank avals the bill
Cost and paperwork	Higher fees, more drafting	Lower fees, simpler
When you get goods	When documents arrive and are paid or accepted	Same
Best fit	New supplier, large order, nervous seller	Established supplier, steady orders

Who carries the risk at each step?

The question to keep asking is: at this moment, who’s out of pocket if things go wrong?

With a letter of credit, the supplier is safest. Once it ships and presents compliant documents, your bank must pay, whether or not you’re happy. Under UCP 600 the bank has a maximum of five banking days after presentation to examine the documents, and unless the credit says otherwise, the supplier must present them within 21 calendar days of shipment. You’re protected only in the sense that the supplier must produce precisely the documents you specified. Banks deal in documents, not goods, so a container of wrong-sized stock with perfect paperwork still gets paid.

With a documentary collection, the risk swings towards the supplier. If you refuse to pay or accept, the supplier’s goods sit at an Australian port running up storage while it finds another buyer or ships them home. Under D/A it’s riskier again, because you’ve collected the goods and the supplier is relying on your signed promise.

That’s why the decision usually comes down to trust. A first order with a new factory often goes on a letter of credit. By the third or fourth smooth shipment, many suppliers will happily switch to D/P, then to D/A or open account.

The shipping detail that quietly undoes a collection

Here’s the mistake that catches small importers and their suppliers alike. A collection only works as protection if the documents actually control the goods. That means an original, negotiable ocean bill of lading, made out “to order”, which the shipping line needs to see before it releases the container.

If the goods move by air freight, the air waybill is not a document of title; the airline releases cargo to the named consignee. A sea waybill or a telex release works the same way. In those cases, the “documents” your bank holds don’t stop you from collecting the goods, so the collection is really just a payment reminder. Suppliers who know this will push for a letter of credit or payment up front on air shipments.

The Incoterms rule on your contract (FOB, CIF, DAP and so on) matters too. It decides who books freight and insurance, and so which documents exist and who holds them. Get the payment method and the shipping terms agreed together, not separately.

The costs nobody puts on the pro forma

Letter of credit costs come from several directions: an issuing fee, amendment fees each time a date or quantity changes, and on the supplier’s side, advising and sometimes confirming fees. A discrepancy, such as a misspelt port name or a late presentation, can trigger a fee and a delay while you decide whether to accept the documents anyway. Collection fees are usually lower and simpler.

The bigger cost is what each one ties up. Your bank will treat an open letter of credit as if you’d already borrowed the money, so it sits inside a trade facility limit and may need security. A D/P collection needs no limit at all, but you need the cash ready the day the documents arrive.

If the cash-on-arrival part is what’s worrying you, an import finance facility can pay the bill and give you time to sell. You can check your options here in about a minute.

Don’t forget the border costs

Paying the supplier isn’t the last cheque. For goods worth more than $1,000, you (or your customs broker) lodge a full import declaration, and the Australian Border Force requires duty, GST and charges to be paid before the goods are released. business.gov.au notes that most imports attract 10% GST, plus possible duty, processing charges, freight, storage and brokerage.

One way to ease that is the ATO’s deferred GST scheme, which lets eligible importers pay import GST through their BAS rather than at the border. The catch: you must lodge monthly, online, and be up to date with lodgements and payments. If you’re on quarterly BAS, the switch to monthly only takes effect from the start of the next quarter, so plan ahead of your peak import season.

Fake bank details: a quieter reason to use the banks

Most small importers worry about the supplier failing to ship. A more common loss comes from an email. Scamwatch’s Targeting Scams report puts payment redirection losses at about $152.6 million in 2024, third among all scam types. The trick is simple: a fake “updated bank details” email from your supplier lands just before the balance is due.

Both a letter of credit and a collection send payment bank to bank, to the supplier’s bank named in the instrument, rather than to account details typed into an email. That doesn’t make you scam-proof, so still phone your supplier on a known number before any change, but it removes the most common opening.

An illustrative example

This scenario is illustrative only. A Brisbane homewares importer finds a new ceramics factory in Vietnam. The first order is large, and the factory asks for an LC at sight. The importer’s bank wants a trade facility and security to issue it, which would take weeks to arrange.

Instead, the importer negotiates: a 20% deposit by telegraphic transfer, the balance on D/P terms, shipped on a full set of original bills of lading, with an independent pre-shipment inspection at the factory. The factory agrees because it holds title until the documents are paid. When the documents reach the importer’s bank, an import finance lender pays the bill and the GST, and the importer repays over the following 120 days as stock sells through.

By order three, the factory offers D/A at 60 days, and the importer no longer needs finance to bridge the gap between payment and sale.

Which should you choose? A quick filter

Go for a letter of credit when:

• the supplier is new, or insists on one;
• the order is large relative to your balance sheet;
• you have, or can get, a trade facility with a bank.

Go for a documentary collection when:

• you’ve traded with the supplier before, or can offer a deposit;
• goods ship on an original negotiable bill of lading;
• you want lower fees and less drafting;
• you’d rather keep your bank limits free.

Consider open account only once trust is solid, and pair it with supply chain finance if you want longer terms without straining the supplier. For the full list of trade options and their other names, browse the A–Z index or the trade finance entry.

Ready to fund the next container?

Whichever document your supplier settles on, the pressure point is the same: a bill to pay on a fixed day, GST at the border, and stock that won’t turn into sales for weeks. That gap is exactly what import and trade funding is for, and it’s a big part of what we help importers sort out.

Tell us about the shipment, the supplier terms and when the documents are due. The enquiry takes about 60 seconds, and asking won’t touch your credit file: there’s no credit check when you first enquire. Your details aren’t passed around to a crowd of lenders either, so your phone stays quiet. One person who knows the trade shelf reads your enquiry and calls you to talk through it.

Please fill the form in accurately, especially your turnover and the order size, so we can point you at the right facility first time.

Find out where you stand →