I. Understanding the Three Key Principles of Letters of Credit
A Letter of Credit (L/C) is a written undertaking issued by an issuing bank at the buyer’s request to make payment to the seller upon presentation of complying documents, effectively transforming commercial credit into bank credit. Before proceeding, it is essential to grasp three principles: first, the principle of bank credit, meaning the issuing bank assumes primary liability for payment and must honor the draft provided the documents are compliant;
second, payment against documents, meaning banks examine only the documents and not the physical goods—the quality of the goods is irrelevant to the payment obligation; and third, the principle of independence, meaning that once issued, the L/C operates independently of the underlying trade contract; even if the contract contains different stipulations, these do not affect the document examination process under the L/C.
The Uniform Customs and Practice for Documentary Credits (UCP 600, ICC Publication No. 600) serves as the common set of rules governing document examination, presentation, and payment; most export orders for energy storage components utilize L/Cs issued in accordance with these rules.
II. Eight-Step Operational Process
Step 1: The buyer and seller agree in the contract on the use of a Letter of Credit (L/C) for settlement, as well as key elements such as the validity period and shipment period. Step 2: The buyer completes an L/C application and submits a security deposit or guarantee to the issuing bank to request the issuance of the L/C. Step 3: The issuing bank issues the L/C and forwards it via an advising bank to the seller’s location. Step 4: The advising bank verifies the authenticity of the L/C (checking seals or test keys) and delivers it to the beneficiary. Step 5: The exporter reviews the L/C to ensure terms align with the contract; if unacceptable terms are found (e.g., “soft clauses” or requirements for unobtainable documents), the exporter immediately requests the buyer to amend the L/C. Step 6: Once confirmed correct, the exporter arranges production, inspection, space booking, and shipment in accordance with the L/C terms. Step 7: The exporter prepares the full set of documents as required by the L/C and submits them to the bank. Step 8: The bank reviews the documents (within a maximum of five banking days); if the presentation is compliant, the bank effects payment or negotiation, claims reimbursement from the issuing bank, and the buyer ultimately makes payment to redeem the documents.
III.
L/C Review and Prevention of “Soft Clauses”
Reviewing the L/C is the first line of defense for ensuring secure payment collection.
Key areas for verification include: the creditworthiness of the issuing bank (if credit is mediocre or country risk is high, a confirmation should be required); consistency of goods description and amount with the contract; logical consistency regarding shipment, validity, and presentation periods; feasibility of obtaining required documents; and the absence of unreasonable fee clauses.
Typical “soft clauses” include stipulations such as “this L/C becomes effective only after the import license is issued” or “two out of three original Bills of Lading to be sent directly to the buyer.” The former places the L/C’s effectiveness under the buyer’s control, while the latter weakens the exporter’s control over the goods; in both cases, one should insist on deletion or amendment to a requirement for “presentation of the full set (3/3) of original Bills of Lading.”
Issues discovered during the review must be addressed through amendments requested by the L/C applicant, and any amendment is valid only with the unanimous consent of the beneficiary, the confirming bank, and the issuing bank.
IV. Key Points for Document Preparation and Presentation
Document preparation centers on the commercial invoice and requires consistency across all elements—specifically, consistency between documents and the Letter of Credit (L/C), among the documents themselves, and between the documents and the goods. The goods description on the invoice must match the L/C exactly; the bill of lading date must not be later than the latest shipment date; the insurance policy date must not be later than the bill of lading date; and dates on documents such as the Certificate of Origin and inspection certificates must be logical.
Regarding presentation timeframes, in accordance with Article 14 of UCP 600, a presentation containing original transport documents must be made no later than 21 calendar days after the date of shipment and, in any event, no later than the expiry date of the L/C.
A recommended practical approach is “two-stage presentation”: submit other documents to the bank for pre-review before the transport documents are issued so that any issues can be rectified promptly, then make the formal presentation after obtaining the bill of lading; this significantly reduces the risk of payment refusal due to discrepancies.
Upon receipt of a notice of refusal, the bank must provide notification via telecommunication no later than the fifth banking day following the day of presentation, itemizing each discrepancy.
V. Special Considerations for Letters of Credit Involving Energy Storage Components
Energy storage components (such as cells, modules, packs, and BMS units) are generally classified as Class 9 dangerous goods. Three key points require attention during the letter of credit (LC) issuance and document preparation stages: First, document availability—if the LC requires documents such as UN38.3 reports, transport condition identification certificates, or dangerous goods packaging certificates, confirm at the time of contract signing that these documents can be issued in accordance with LC requirements and correspond precisely to the goods; any documents that cannot be obtained should be excluded or substituted in advance. Second, consistency of transport documents—when booking space for dangerous goods, the cargo description, UN number, and packaging details on the bill of lading must match those in the identification certificate to avoid payment refusal or inspections at the port of destination due to discrepancies between documents and goods. Third, alignment of insurance and trade terms—for CIF/CIP transactions, the insurance policy must meet LC requirements and be dated no later than the bill of lading;
for energy storage batteries, it is recommended to insure for 110% of the invoice value and specify coverage for dangerous goods risks. For orders involving issuing banks with average credit ratings, one may request confirmation from institutions such as the Export-Import Bank of China to secure a dual payment guarantee.
Conclusion
The management of export letters of credit for energy storage components can be summarized as: “prioritize LC review, enforce strict document preparation, and finalize dangerous goods documentation early.”
By screening out “soft clauses” before LC issuance, eliminating discrepancies before document presentation, and finalizing the dangerous goods documentation chain at the contract signing stage, the letter of credit can effectively serve as a bank credit backstop, ensuring secure payment collection for large-value orders.
