What Is a Letter of Credit in Apparel Sourcing?

A letter of credit is a bank-issued guarantee that a buyer's payment will reach the seller once specific shipping documents are presented. In apparel sourcing, L/Cs act as a trust bridge between DTC brands placing orders and overseas factories producing goods they haven't yet seen.

How an L/C Actually Works

Your bank (the issuing bank) sends a commitment to your factory's bank (the advising or confirming bank). The factory ships your order, collects documents like the bill of lading, packing list, and commercial invoice, then presents them to their bank. If everything matches the L/C terms exactly, payment releases. The whole cycle typically runs 5 to 14 days after document presentation, depending on whether you're using an L/C at sight or a deferred payment structure. Banks charge 0.5% to 2% of the L/C value, plus courier and amendment fees.

What's Inside the Document

Every L/C spells out non-negotiable conditions. Expect to see the beneficiary name (your factory), the amount and currency, latest shipment date, port of loading, port of discharge, required documents, and partial shipment permissions. The description of goods must match your purchase order exactly. One typo in the fabric composition or style number can trigger a discrepancy. Banks don't judge quality. They judge paper. If the documents don't match letter for letter, payment stalls.

Why It Matters for Apparel Brands

Factories in Bangladesh, Vietnam, and Cambodia often require L/Cs for orders above $30,000 to $50,000. It guarantees they won't ship 10,000 hoodies and get ghosted. For brands, it means you don't pay until proof of shipment exists. That's leverage. It also forces both parties to agree on specs, deadlines, and inspection standards upfront. If you've agreed to AQL inspection at a 2.5 major defect limit, that can be referenced in the L/C terms, creating accountability.

Common Mistakes That Kill Deals

Discrepancies are the silent killer. Misspelled beneficiary names, wrong HS codes, shipment dates that fall on a Sunday (when ports are closed), or missing documents like a certificate of origin all trigger rejection. Amendments cost $50 to $150 each and add days. Another mistake: opening an L/C too late. Most factories won't cut fabric until the L/C hits their bank, so a two week delay on your end becomes a two week delay on your delivery. Budget 7 to 10 business days for L/C issuance.

How L/Cs Show Up in an Ohzehn Deal

When Ohzehn matches you with a vetted factory, payment terms are negotiated during the 72 hour quote process. For first orders with new partners, many factories prefer L/C at sight for security. As relationships mature, you may shift to 30% T/T deposit with 70% against documents. Ohzehn's network includes factories that accept lower L/C thresholds for brands with strong order histories, but don't expect a $5,000 test run to qualify. L/Cs make sense at scale.

When to Use L/Cs vs. Alternatives

Use an L/C payment structure when you're placing orders above $25,000 with a factory you haven't worked with before, when the factory insists on it, or when you need documented proof of shipment for investor or lender reporting. Skip it for smaller test runs where T/T (telegraphic transfer) deposits are simpler and cheaper. Some brands use a hybrid: L/C for the first two orders, then graduate to open account terms. Trade credit insurance is another alternative if your factory accepts net 30 or net 60 terms, though that's rare in apparel manufacturing.

Documentary Requirements You'll Need

Prepare to provide a full commercial invoice, packing list, bill of lading (or airway bill), certificate of origin, and sometimes a pre-shipment inspection certificate. Factories producing for brands with sustainability claims may also need to attach certifications like Recycled Claim Standard documentation or BSCI audit reports. Every document must reference the L/C number. If your factory subcontracts finishing, confirm whose name appears on the bill of lading before they ship.

Costs and Timeline Breakdown

Expect total L/C fees between 1% and 3% of order value when you add issuing charges, advising fees, amendment costs, and courier expenses. A $75,000 order might cost $1,500 to $2,250 in banking fees alone. Timeline: 5 to 10 days for issuance, production lead time (typically 45 to 90 days for apparel), then 5 to 14 days for document presentation and payment release. Build these windows into your cash flow planning. Factories operating on thin margins can't float your payment for an extra month while banks shuffle paper.