Why Most Equipment Sellers Reject Letters of Credit

[MikePhua]

The Rise and Decline of Letters of Credit in Equipment Trade
Letters of Credit (L/C) were once the gold standard for international trade, especially in the heavy equipment sector where transactions often exceed six figures. An L/C is a formal commitment issued by a buyer’s bank guaranteeing payment to the seller upon fulfillment of specific conditions. It offers security to both parties—assuring the seller of payment and the buyer of delivery. Yet in recent years, many equipment sellers have moved away from accepting L/Cs, citing complexity, delays, and cost.
Terminology annotation:

• L/C (Letter of Credit): A bank-issued document guaranteeing payment to a seller if specified conditions are met.
  
• T/T (Telegraphic Transfer): A direct bank-to-bank wire payment, often used for faster transactions.
  
• Issuing Bank: The buyer’s bank that creates the L/C.
  
• Negotiating Bank: The seller’s bank that verifies documents and receives payment.
  
• Sight L/C: A type of L/C payable immediately upon presentation of compliant documents.
  
• Usance L/C: A deferred payment L/C, payable after a set period.
  

In the early 2000s, a Chinese contractor attempted to purchase a Caterpillar D8N dozer from a U.S. supplier using an L/C. Despite the buyer’s bank being reputable, the seller declined, citing prior delays and document disputes with other L/C transactions. The deal collapsed, and the buyer had to source equipment locally at a higher price.
Why Sellers Prefer Simpler Payment Methods
The rejection of L/Cs by equipment sellers is often rooted in operational friction. Unlike cash or wire transfers, L/Cs require precise documentation—commercial invoices, bills of lading, inspection certificates, and sometimes insurance documents. Any discrepancy, even a typographical error, can delay payment or void the L/C.
Common seller concerns:

• Excessive paperwork and compliance burden
  
• Risk of delayed payment due to document discrepancies
  
• High bank fees for L/C processing and negotiation
  
• Limited control over buyer’s bank and its responsiveness
  
• Preference for immediate liquidity via T/T or cash
  

Preferred alternatives:

• T/T in advance for smaller equipment or parts
  
• Escrow services for mid-range transactions
  
• Manufacturer-backed financing for new units
  
• Cash on delivery for domestic deals
  
• Leasing or rental agreements with buyout options
  

Recommendations:

• Buyers should confirm seller’s payment preferences before initiating L/C
  
• Use sight L/C with minimal conditions to reduce friction
  
• Engage trade finance specialists to structure clean documentation
  
• Offer partial T/T deposit with balance via L/C to build trust
  

In Saudi Arabia, a fleet buyer negotiated a deal for ten wheel loaders using a hybrid model—30% upfront via T/T and 70% via L/C. The seller accepted after reviewing the issuing bank’s reputation and simplifying the document requirements.
The Role of Financing and Credit in Equipment Sales
Many sellers avoid L/Cs not because they distrust the buyer, but because they prefer not to tie up capital or deal with bank bureaucracy. In-house financing is rare among small dealers, as it requires reserve funds and risk management. Instead, sellers often refer buyers to third-party lenders or manufacturer finance arms.
Financing options:

• Manufacturer-sponsored low-interest loans
  
• Equipment leasing with maintenance packages
  
• Private party loans secured by collateral
  
• Bank loans with direct payment to seller
  
• Peer-to-peer lending platforms for small contractors
  

Recommendations:

• Buyers should secure financing before approaching sellers
  
• Use financing institutions familiar with equipment valuation
  
• Structure payment schedules aligned with project cash flow
  
• Avoid requesting seller to act as lender unless relationship is long-term
  

In Alaska, a self-employed operator used his savings as collateral to secure a low-interest bank loan for a used excavator. The seller received full payment via T/T, and the buyer avoided the complexity of L/C documentation.
Global Trends and Regional Preferences
Acceptance of L/Cs varies by region. In Asia and the Middle East, L/Cs remain common due to banking regulations and trade customs. In North America and Europe, sellers lean toward wire transfers and escrow services. The shift is also influenced by digital banking, real-time payment systems, and the rise of online equipment marketplaces.
Regional patterns:

• Asia: L/Cs still widely used for cross-border deals
  
• Middle East: Preference for L/Cs in government and large contracts
  
• North America: T/T and escrow dominate private sales
  
• Europe: Mixed use of L/Cs, with preference for SEPA transfers
  
• Africa: Cash and mobile payments more common in local deals
  

Recommendations:

• Buyers should adapt payment method to seller’s region and banking culture
  
• Use international trade consultants for cross-border transactions
  
• Consider currency risk and exchange rate timing when structuring payment
  
• Maintain clear communication with both banks to avoid delays
  

In Kenya, a road construction firm used mobile money to pay for a locally sourced loader, while importing a grader from China via L/C. The dual strategy allowed flexibility and compliance with both seller expectations.
Conclusion
While Letters of Credit offer security and structure, they are increasingly viewed as cumbersome in the fast-paced world of equipment sales. Sellers prioritize speed, simplicity, and liquidity—making T/T, escrow, and direct financing more attractive. For buyers, understanding these preferences and preparing accordingly can make the difference between a closed deal and a missed opportunity. In the machinery market, trust is built not just on documents—but on clarity, readiness, and respect for how business is done.