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What are the common risks in issuing letters of credit for transit trade and corresponding countermeasures

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I am the person in charge of a small and medium-sized enterprise engaged in Southeast Asia-focused transit trade. I recently have an order that requires settlement via letter of credit, but I heard that issuing L/C for transit trade carries high risks.

Some of my peers previously faced non-payment of goods proceeds due to soft clauses, and even encountered total loss of cargo title control. I am quite concerned now, and want to know the specific existing risks, their root causes, and how to prevent these problems from disrupting my business operations.

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Alexander
AlexanderYears of service：10Customer Rating：5.0

Senior Trade AdvisorStart a Chat

A frequently overlooked misconception of risks in transit trade L/C issuance is ambiguous handling of L/C clauses，especially soft clauses. For example，a clause requiring "goods must be inspected by an institution designated by the buyer" without clarifying the exact name of the institution，or a clause specifying "the bill of lading shall show the shipping company designated by the buyer" without verifying the qualification of the shipping company in advance，will leave subsequent operations in a completely passive position.

If a soft clause triggers a discrepancy，the bank will dishonor the payment for goods，the detained goods at the port will generate demurrage and storage fees，and even be auctioned by the customs. Loss of cargo title control is also a core risk: when a straight bill of lading is adopted，the consignee can take delivery of goods without endorsement，and once the buyer defaults，the seller will completely lose the ownership of the goods.

Physical risk isolation measures include: carefully reviewing all clauses before L/C issuance and deleting ambiguous soft clauses，selecting an order bill of lading and controlling the entire endorsement process，cooperating with reliable logistics service providers，and retaining the original bill of lading until full payment is received.

Exclusive Loss Mitigation Tips: Purchase trade credit insurance to cover non-payment risks，once a discrepancy is encountered，immediately communicate with the buyer to revise the L/C or negotiate alternative payment terms，if cargo title control is lost，freeze the goods through legal channels or seek assistance from local chambers of commerce.

Charlotte
CharlotteYears of service：4Customer Rating：5.0

Currency Exchange AdvisorStart a Chat

Risks in customs declaration procedures involved in transit trade L/C issuance mainly focus on certificate of origin and customs valuation. If the certificate of origin required by the L/C does not match the actual origin of the goods, or reasonable price supporting documents cannot be provided during customs valuation, customs clearance may be blocked.

It is required to confirm the authenticity of the certificate of origin in advance, keep complete trade documents including purchase contracts, invoices and transport documents, ensure consistent pricing logic, and avoid unnecessary customs queries.

John
JohnYears of service：6Customer Rating：5.0

Export Tax Rebate AdvisorStart a Chat

Cargo title control is the top priority in transit trade. The circulation of bill of lading under letter of credit directly affects the ownership of the goods. If a straight bill of lading is used, the consignee can take delivery of goods without endorsement, which carries extremely high risks.

It is recommended to use an order bill of lading, control the endorsement process, and ensure the bill of lading is released only after full payment is received. Meanwhile, select reputable shipping companies to avoid container roll-over or cargo loss, and track the status of goods on a regular basis.

William
WilliamYears of service：10Customer Rating：5.0

International Logistics AdvisorStart a Chat

Transit trade L/C issuance involves cross-border tax issues such as VAT deferral and withholding tax. Failure to properly arrange the tax structure may lead to double taxation or tax penalties.

It is required to learn about the tax policies of the transit country in advance, make rational use of VAT deferral policies, ensure transaction pricing complies with the arm's length principle, and avoid tax risks caused by related party transactions.

Daniel
DanielYears of service：8Customer Rating：5.0

Legal AdvisorStart a Chat

In terms of foreign exchange settlement, transit trade L/C issuance needs to ensure consistency between capital flow and cargo flow. If foreign exchange receipts and payments do not match customs declaration data, the transaction may be classified as abnormal by the State Administration of Foreign Exchange.

It is required to retain a complete document chain including letter of credit, bill of lading, invoice and customs declaration form to ensure data consistency, and adopt the CIPS system for cross-border RMB payment to reduce exchange rate fluctuation risks.

David
DavidYears of service：3Customer Rating：5.0

Business Development AdvisorStart a Chat

Soft clauses in letter of credit are the main risk points, such as clauses stating "goods must be inspected and a certificate issued by the buyer" without specifying the inspection institution, or "the bill of lading must show the shipping company designated by the buyer". It is required to carefully review all clauses before L/C issuance, delete ambiguous or unreasonable soft clauses, add clear inspection standards and designated institutions, to avoid dishonor of payment caused by discrepancies.

Ella
EllaYears of service：10Customer Rating：5.0

Senior Financial AdvisorStart a Chat

Goods for transit trade may face customs inspection. If the packaging fails to meet requirements or documents are incomplete, port detention will occur.

It is required to ensure goods packaging complies with international standards, complete documents such as MSDS are ready, learn about the inspection procedures of the transit country in advance, prepare all relevant documents, and cooperate with inspection officers to minimize port detention duration.

Emily
EmilyYears of service：3Customer Rating：5.0

Client Success AdvisorStart a Chat

Transit trade L/C issuance requires optimization of supply chain structure and selection of appropriate transit ports and logistics routes. If the transit port is congested or logistics cost is excessively high, capital turnover will be negatively affected.

It is required to evaluate the efficiency and cost of different transit ports, select a stable logistics solution, and arrange inventory properly to avoid excessive capital occupation.

Note: We respect all users' opinions and contributions. However, comments and answers reflect the views of their respective authors only.
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