The letter of credit (L/C) to import olive oil

In brief. The documentary letter of credit (L/C or documentary credit) is a payment undertaking given by the importer's bank: the seller is paid only if they present strictly compliant documents (invoice, packing list, bill of lading B/L, COA, EUR.1…). It protects both parties on a first import, at the price of bank fees and a demanding documentary formalism — the slightest discrepancy blocks payment. For established relationships, deposit + balance against documents or documentary collection are lighter alternatives.

Paying a supplier you do not yet know is the number one risk of a first import. The letter of credit answers this problem by shifting trust to the banks. This article deals with the operational mechanics of the instrument — not the negotiation of payment terms, covered elsewhere.

What is a letter of credit?

The L/C is an irrevocable undertaking by the issuing bank (the importer's) to pay the seller, provided that the latter presents the required documents, compliant with the terms of the credit. The founding principle:

• The seller is paid only against compliant documents.
• The buyer pays only if the documents attest to the agreed shipment.
• Banks handle documents, not the goods themselves.

It is this last point that makes the strength and the limit of the tool: the bank checks papers, not the oil. Hence the importance of a COA per lot and a reference sample upstream.

How an L/C works, step by step

1. Contract: buyer and seller agree on payment by L/C.
2. Opening: the importer asks their bank to issue the L/C in favour of the seller.
3. Advising / confirmation: the seller's bank advises the credit; in a risky market, the seller may request a confirmation (their bank also guarantees payment).
4. Shipment: the seller loads the goods and gathers the documents.
5. Presentation: the documents are handed to the bank, which checks their compliance.
6. Payment: if everything is compliant, the seller is paid; the documents move to the buyer, who takes possession of the goods.

The documents required by the L/C

This is the heart of the mechanism. The L/C lists precisely the documents to be presented. For an olive oil import, the typical set includes:

Document	Role	Issued by
Commercial invoice	Value, description, incoterm	Seller
Packing list	Packing / weight detail	Seller
Bill of lading (B/L)	Proof of shipment + title of ownership	Shipping line
COA	Lot quality analysis (IOC-accredited lab)	Laboratory
EUR.1	Preferential certificate of origin (EU)	Customs / chamber
Phytosanitary certificate	Plant health compliance	Competent authority

The description of the goods and the statements (incoterm, weight, category) must be identical from one document to another and compliant with the text of the L/C. The bill of lading deserves particular attention: see the bill of lading (B/L) for olive oil.

Advantages of the L/C

• Mutual security: the seller is sure of being paid if compliant; the buyer pays only against shipment documents.
• Ideal for a first import or a risky market, when trust is not established.
• International legal framework: L/Cs follow standardized rules (ICC UCP 600), recognized worldwide.
• Financing: it can facilitate access to credit and pace cash flow.

Costs and pitfalls to know

Security has a price and constraints. To anticipate:

• Bank fees: opening, confirmation, advising, document examination commissions — to be costed with your bank **. They weigh most heavily on small orders.
• Strict formalism: the slightest discrepancy (typo, differing weight, expired date) suspends payment until the reserve is lifted. This is called "non-compliant documents".
• Delays: opening, shipment, examination — the cycle is longer than a simple bank transfer.
• The bank checks the papers, not the oil: an L/C has never guaranteed quality. It combines with COA + sealed sample, never in their place.

Golden rule: prefer a confirmed L/C on a first import or a risky market — the seller's bank adds its guarantee to that of the issuing bank.

The alternatives to the L/C

The L/C is not always the most suitable tool. Depending on the level of trust and the size of the order:

• 30% deposit + balance against documents: lighter, very common. The deposit commits both parties, the balance is released on presentation of the documents. A good compromise as soon as a minimum of trust exists.
• Documentary collection: the bank transmits the documents against payment (D/P) or against acceptance of a draft (D/A). Less costly than an L/C, but without a bank payment guarantee — the bank does not commit to pay.
• Bank transfer (advance / open account): simple and inexpensive, but reserve the advance for trusted suppliers and open account for established relationships.

The choice between these options is a matter of negotiation: see negotiating payment terms. As for order of magnitude, a container of Tunisian oil starts around ~€3.80/kg FOB at origin, which helps to weigh the cost of an L/C against the amount at stake.

FAQ

What is a documentary letter of credit?

It is a payment undertaking by the importer's bank towards the seller, honoured only if the latter presents documents strictly compliant with the terms of the credit (invoice, B/L, COA, EUR.1…). Banks handle documents, not the goods, which secures both parties on a first import.

What documents must be presented in an L/C for olive oil?

The typical set includes the commercial invoice, the packing list, the bill of lading (B/L), the lot COA (IOC-accredited laboratory), the EUR.1 certificate of origin for the EU and the phytosanitary certificate. All statements (weight, incoterm, description) must be identical from one document to another.

Should the L/C be confirmed or unconfirmed?

On a first import or a risky market, prefer a confirmed L/C: the seller's bank adds its payment guarantee to that of the issuing bank. Confirmation has an additional cost, but it strongly reduces the bank risk on the seller's side.

How much does a letter of credit cost?

It generates opening, confirmation, advising and document examination fees, to be costed with your bank — amounts to be verified. These fees weigh most heavily on small orders; on a full container, they remain proportionally moderate given the security provided.

Does the L/C guarantee the quality of the oil?

No. The bank checks the compliance of the documents, not the goods themselves. Quality is secured upstream with a COA per lot from an IOC-accredited laboratory and a sealed reference sample. The L/C protects the payment, not the chemical compliance of the product.

What are the alternatives to the letter of credit?

The main ones are the 30% deposit + balance against documents (light and common), documentary collection D/P or D/A (cheaper but without a bank payment guarantee) and the bank transfer (advance or open account, reserved for trusted relationships). The choice depends on the level of trust and the amount of the order.

---

Structuring the payment of your import? Request a quote: we reply within 24-48h with a quotation by incoterm and the documents suited to your bank and your market. To choose between L/C, deposit and documentary collection, see negotiating payment terms.