Letter of Credit for China Factory Orders: What to Know

Yes — you can pay a China factory by letter of credit (LC) for project orders, but acceptance is selective rather than standard. Most Chinese factories prefer a 30/70 telegraphic transfer (TT) structure for small and mid-sized project orders, and will generally only agree to an LC when the order is large enough to justify the extra banking cost, paperwork and payment delay. When an LC is used, it is normally an irrevocable letter of credit governed by UCP 600, and the factory is paid only after presenting shipping documents that comply strictly with the LC terms — which is exactly where both the protection and the friction come from.

This guide goes deeper than a general overview of payment terms Chinese factories accept for commercial project orders: it focuses only on the letter of credit — when factories say yes, how the protection mechanism really works, what an LC costs you in fees and flexibility, and when a staged TT structure is the smarter choice for a commercial building project.

When Will a Chinese Factory Accept a Letter of Credit?

Acceptance comes down to order size, factory scale and cash flow. An LC means the factory finances the entire production run itself: there is no deposit to buy raw materials with, and payment only arrives after goods are shipped, documents are couriered to the bank and the examination cycle is complete. For a furniture or building material factory quoting a modest project package, that working-capital burden is usually a deal-breaker. For most small and mid-sized project orders, the standard structure Chinese factories expect is a 30/70 TT split — a 30% deposit to start production and the 70% balance paid before shipment.

Larger export-oriented manufacturers are a different story. Factories that regularly ship full-container orders to developed markets often have a documentation team that knows how to prepare a compliant LC presentation, and for a large project order the bank-backed certainty of an LC can outweigh the cash-flow cost. As a working rule: the bigger the order relative to the factory’s typical contract size, the more realistic LC terms become; the smaller the order, the more firmly the factory will steer you back to TT. Smaller workshops — including many of the specialist factories that produce excellent custom joinery, stone or metalwork — frequently lack the back-office capability to handle LC documentation at all, regardless of order value.

This is one of the places a china sourcing agent earns its keep on payment strategy alone: knowing before negotiation starts which factories in a category will realistically entertain LC terms, and which will quietly pad the price to compensate for them.

How Does a Letter of Credit Actually Protect a Project Buyer?

An LC is an independent undertaking by your bank (the issuing bank) to pay the factory, provided the factory presents documents that comply with the conditions written into the credit. The core protective principle is simple: the factory does not get paid for promising to ship — it gets paid for proving, on paper, that it shipped what the LC describes, when and how the LC required.

The mechanics are standardized. Nearly all commercial LCs are issued subject to UCP 600, the ICC’s uniform rules for documentary credits, and under those rules banks apply strict document compliance: a late shipment date, a quantity outside tolerance, or even inconsistent descriptions across documents can justify refusal. Under UCP 600, the examining bank has a maximum of five banking days following presentation to determine whether the documents comply. Until that examination clears, no money moves.

For a project buyer, the protection is real but narrow. The LC guarantees that funds are only released against evidence of shipment on the agreed terms — a genuine improvement over wiring a large balance on trust. What the LC does not do is verify the goods themselves. Banks examine documents, not products: an LC presentation can be perfectly compliant while the crates contain furniture with the wrong finish or tiles from a different production batch. That gap is why physical verification before shipment matters at least as much as the payment instrument, whatever terms you settle on.

LC at Sight vs Usance LC: What Is the Difference?

The two main variants differ only in when payment is made after compliant documents are presented.

An LC at sight pays the factory as soon as the bank has examined the documents and found them compliant. From the factory’s perspective this is the more acceptable form: cash arrives shortly after shipment, limiting the working-capital gap to the production period plus the document cycle. Most Chinese factories that agree to LC terms at all will push for at sight.

A usance LC (deferred payment or acceptance credit) pays at a fixed tenor after presentation or after the bill of lading date — typical tenors run 30, 60, 90 or 120 days. For the buyer, a usance LC is effectively supplier-financed credit: the goods can be on the water, or even installed on site, before the payment falls due, which can align outflows with project milestones or an employer’s payment certificate cycle. Factories, predictably, resist usance terms hardest, and when they do accept them the cost of that financing tends to be built back into the unit price. If you compare a TT quote against a usance-LC quote from the same factory, expect the difference to show up in the numbers — one more reason to read a Chinese factory quotation line by line and confirm exactly what payment assumption sits behind it.

What Does an LC Cost in Fees, Time and Flexibility?

The protection of an LC is not free, and the cost comes in three currencies.

Bank fees. Between issuance, advising, negotiation, courier and discrepancy charges — and confirmation fees if the factory’s bank requires the credit to be confirmed — combined LC banking costs commonly land in the range of roughly 0.5% to 1.5% of the order value, with the exact figure depending on your bank, your credit standing and the LC’s complexity. On top of the percentage-based charges, issuing banks typically require the applicant to post a cash margin or use a trade-finance line, which ties up your own credit capacity for the life of the credit.

Time. Every LC adds an administrative layer to the order timeline: drafting and agreeing the LC terms before production can start, preparing documents after shipment, couriering originals between banks, and the examination window of up to five banking days at each examining bank. Discrepant documents — which are common on first presentation — trigger another loop of correction, re-presentation or waiver requests, each adding days and fees.

Flexibility. This is the cost project buyers underestimate most. Construction procurement changes constantly: a revised delivery schedule, a substituted finish, a split shipment because one zone of the site is ready early. Under an LC, any change that touches the credit’s terms — latest shipment date, quantity, port, document requirements — needs a formal amendment issued through the banks, and every amendment carries its own bank charges and processing days on both sides. A payment structure that punishes change is an awkward fit for an industry defined by it.

Which Documents Does a China Factory LC Typically Require?

The document set is the heart of the credit: it is what the banks examine and what triggers payment. A typical LC for a China project order calls for:

• Commercial invoice — issued by the factory, matching the LC’s goods description and value exactly
• Packing list — quantities, carton or crate counts, weights and measurements consistent with the invoice
• Full set of original bills of lading — ocean B/Ls are customarily issued in a set of three originals, evidencing shipment on board within the LC’s latest shipment date
• Certificate of origin — issued or certified in China, often required for customs clearance and preferential duty treatment at destination

Depending on the destination and product, the credit may add other paperwork the shipment would need anyway. These are the same core papers every containerized order generates — the difference under an LC is that errors in them delay your factory’s payment instead of just annoying your customs broker. For what each paper does after shipment, see our guide to the shipping and customs documents that come with a China project order.

Is There a More Practical Option for Most Project Orders?

For the majority of commercial project orders, yes: a staged TT structure combined with physical verification before the balance is paid usually delivers better real-world protection per dollar of friction than an LC. The logic is straightforward. An LC protects you against paying for goods that were never shipped; it does nothing about goods that were shipped but are wrong. Staged payment attacks the risk from the other direction: the standard deposit and balance payment terms (30/70) keep 70% of the order value in your hands until production is complete, and that unpaid balance is leverage an LC cannot replicate — the factory’s incentive to fix a defect is strongest while it is still waiting to be paid.

The verification layer is what makes the structure work. As a building material sourcing agent handling both furniture and materials packages, FBM ties the balance payment to documented evidence from the factory floor: all inspections are carried out by FBM’s own team at the factory before shipment, with photo and video records delivered to the client. You approve the balance transfer after seeing the actual goods — finishes, dimensions, packing — not after a bank confirms that an invoice matches a packing list. Combined with the deposit-and-balance structure, this covers the practical failure modes of project procurement (wrong product, poor finish, short shipment) that a documentary credit structurally cannot see, at no banking cost and with the flexibility to absorb the schedule and specification changes that real construction programs generate. For multi-category packages, running this through one China building materials and FF&E procurement pipeline also means one payment structure and one verification standard across every factory in the order, instead of negotiating credit terms supplier by supplier.

When Should You Insist on an LC?

None of the above means the LC has no place in China project procurement. There are situations where it is the right call, and a factory serious about large project business will respect that:

First-time, large-value orders. When a single order is large relative to your risk appetite and there is no working history with the factory, the bank’s undertaking is a rational substitute for trust — and at that order scale, well-organized manufacturers are far more likely to accept LC terms in the first place.

Company or lender policy. Many developers, main contractors and government-linked employers have treasury policies that mandate documentary credits above internal thresholds, and some project financing arrangements require imports to be settled by LC. If the policy is fixed, the practical move is not to fight it but to shortlist factories that can genuinely execute LC documentation — and to write the credit’s terms carefully: realistic latest shipment dates, quantity tolerances, and a document list limited to papers the factory can actually produce. Expect the issuing bank to ask for partial or full cash margin — up to 100% of the LC value for applicants without an established trade-finance line.

Usance as project financing. Where cash flow across the project program matters more than banking fees, a 60–90 day usance LC can deliberately shift payment past delivery and installation — provided you accept that the factory will price that credit into the order.

Even when an LC is unavoidable, pre-shipment verification does not become optional — it becomes more important, because once compliant documents are presented, the balance of leverage shifts entirely to the paperwork.

Get a China Procurement Quote for Your Project

If you are weighing payment terms for a commercial building project — a hotel, apartment development, school, hospital, office fit-out, government building or chain roll-out — FBM Sourcing can structure the procurement so the payment mechanism, whether staged TT or LC, matches the order size and your company’s policies. As a china sourcing agent working on a transparent 5–8% agency fee, we negotiate factory terms on your behalf, consolidate multi-factory packages under one payment and verification standard, and document every order with photo and video records before shipment.

To get a quote, send us your drawings, BOQ or product list with quantities, your destination port and your target timeline. FBM works with project owners, developers, main contractors and FF&E contractors on commercial building projects — if that is you, our team will review your package and come back with a sourcing proposal built around it.