Letters of credit with a Korean supplier

A letter of credit replaces your judgement of a supplier with a bank’s promise. It is the standard instrument for a first order with a Korean manufacturer you have not dealt with before, and it is widely misunderstood: it does not protect you against bad goods. It protects you against paying for documents that do not exist.

What an L/C actually promises

Your bank undertakes to pay the supplier when the supplier presents a specified set of documents. That is the whole mechanism. The bank never inspects the goods, never visits the factory, and has no opinion about quality. If the paperwork matches what the credit requires, the supplier gets paid — even if what arrives in the container is wrong.

The documents that get presented

A typical credit for goods leaving Korea calls for a commercial invoice, a packing list, a bill of lading, and a certificate of origin. You can require more, and this is where the instrument earns its cost: the credit is your leverage, because the supplier is paid only against what you specified.

• A third-party inspection certificate. The single most useful addition. It converts an L/C from “did they ship” into “did they ship something an inspector signed off”.
• A packing list with carton dimensions and weights. Cheap to require, and it catches short shipments before the goods sail.
• A clean on-board bill of lading. “Clean” means the carrier noted no damage. “On board” means the goods are actually loaded, not merely received at the terminal.

Discrepancies, which is where L/Cs go wrong

A bank pays against documents that comply exactly. A single mismatched character is enough to make a presentation discrepant, and discrepancies are common — trade finance surveys routinely find that most first presentations contain at least one.

When documents are discrepant, the bank contacts you and asks whether to pay anyway. That moment is worth understanding, because it inverts the relationship: the supplier has already shipped, and you now hold a decision they cannot control. Some buyers use this as leverage. It is also a genuine risk for the supplier, which is why an experienced Korean exporter will read your draft credit carefully and ask for changes before accepting it.

The mismatches that cause it

• The company name on the invoice differing from the name on the credit — including the English trading name versus the registered Hangul name, which frequently differ.
• Shipment or presentation after the dates the credit specifies.
• A description of goods that does not match the credit word for word.
• Missing signatures or stamps on the certificate of origin.

What it costs, and when that is worth paying

Expect issuance fees, amendment fees for every change, and your bank tying up part of your credit line for the duration. On a small order the total cost can be a meaningful share of the goods.

Before you open one

A credit is issued in favour of a named beneficiary at a named bank. Get that wrong and the money goes to the wrong entity, so confirm the supplier’s registered name and status first — the registration lookup takes seconds and is the check most likely to catch a problem before it costs anything.

Ask the supplier for the exact beneficiary details in writing, and compare the account name against the registered business name. A mismatch there is the same warning sign as a request to pay a personal account.