Why an Additional Charge Applies When Using a Letter of Credit (L/C) in Used Car Export Transactions
In the international used car export business, payment structure is not only a financial decision but also a key factor affecting risk allocation, cash flow, and operational cost. Among the commonly used international trade payment methods, Telegraphic Transfer (TT) and Letter of Credit (L/C) differ significantly in structure and execution. For this reason, it is standard practice in the used vehicle export industry for sellers to apply an additional charge when transactions are settled under an L/C.
This article explains the commercial and operational reasons behind this practice, with specific reference to international used car and used vehicle export scenarios.
Structural Differences Between TT and L/C in Used Vehicle Export
TT is a direct bank transfer from the buyer to the exporter. In used car export transactions, TT—especially with partial or full advance payment—allows exporters to receive funds quickly and operate with a shorter cash cycle. The process is straightforward, involves limited documentation, and results in relatively low banking and administrative costs.
A Letter of Credit, on the other hand, is a bank-guaranteed payment instrument governed by international banking rules such as UCP 600. In used vehicle export transactions, an L/C requires the exporter to present a complete and fully compliant set of documents before payment can be released. This structure introduces additional banks, strict documentary requirements, and enhanced compliance checks, all of which increase cost and operational complexity compared to TT.
Higher Banking Costs in L/C-Based Used Car Exports
When an L/C is used in a used car export transaction, multiple banks are involved in advising, examining, and negotiating documents. Each bank charges service fees related to document handling and risk processing. These banking charges arise solely because of the L/C structure and do not exist in TT-based used vehicle exports.
In practice, used car exporters may also face additional charges if amendments are required or if banks raise documentary queries. Given the detailed nature of vehicle-related documentation, L/C transactions in the used car export sector typically involve higher banking and handling costs than other commodity trades.
Documentary Compliance and Operational Complexity
Used car export is a document-intensive business. Under an L/C, payment depends entirely on document compliance rather than the physical condition of the vehicles. Exporters must ensure that all documents—including bills of lading, commercial invoices, inspection certificates, vehicle identification details (VIN), and export compliance documents—strictly match the L/C terms.
This requirement significantly increases administrative workload. Used vehicle exporters often need to engage professional inspection agencies, experienced freight forwarders, and internal compliance teams to avoid discrepancies. The cost of managing this level of documentation and coordination is a direct consequence of using L/C as the payment method.
Financing and Cash Flow Impact on Used Car Exporters
Cash flow is a critical consideration in the used car export business. Vehicles must be purchased, inspected, transported, and stored before shipment. Under TT arrangements, exporters may receive advance payments that help fund these activities.
Under an L/C, payment is generally received only after shipment and successful document negotiation. This extended payment cycle means that used car exporters must pre-finance vehicle procurement, logistics, inspections, and port handling. In many cases, short-term trade finance facilities are required, resulting in interest and financing costs that are directly linked to the L/C structure.
Risk Management in International Used Vehicle Trade
Banks typically classify used vehicle exports as higher-risk transactions due to regulatory requirements, asset characteristics, and country-specific considerations. As a result, enhanced risk assessment and compliance procedures are often applied when handling L/Cs related to used car exports.
Depending on the issuing bank and buyer country, additional risk mitigation measures—such as L/C confirmation or enhanced due diligence—may be required. These measures increase transaction security but also add to the overall cost of execution.
Understanding the Additional L/C Charge
The additional charge applied to L/C-based used car export transactions is not intended to generate extra profit. It is designed to reasonably recover the actual costs arising from increased banking fees, documentary compliance, financing requirements, and risk management efforts that are inherent to L/C payments. In TT-based used vehicle exports, most of these costs are either reduced or eliminated.
Conclusion: Choosing the Right Payment Method for Used Car Exports
A Letter of Credit offers a higher level of payment security for buyers in international used car trade. However, this security comes with additional operational and financial costs for exporters. Applying an additional charge when L/C is used reflects standard international trade practice and ensures a fair allocation of costs between buyer and seller.
For both parties involved in used vehicle export transactions, understanding these differences allows for more informed decisions when selecting a payment method that balances security, efficiency, and overall transaction cost.
