Paying for timber from another continent is a matter of trust. The buyer worries about sending money before the wood is shipped; the seller worries about shipping wood before being paid. A letter of credit solves this by putting banks in the middle. A well-drafted letter of credit timber deal protects both sides: the seller knows payment will come if the right documents are presented, and the buyer knows the bank will only pay against proof that the timber was shipped as agreed.
In this guide we explain how letters of credit work for timber imports, the documents you should require, the costs, the most common discrepancies and how to avoid them. At Global Timber Trade Hub we discuss payment terms with every buyer, and an LC is often the right choice for first orders and large contracts.
In short
- A letter of credit is a bank’s promise to pay the seller against compliant documents.
- It protects buyers from paying for timber that was never shipped.
- It protects sellers from buyers who do not pay after shipment.
- Banks check documents, not the timber, so require an inspection certificate.
- Most LCs follow the ICC rules known as UCP 600.
- Small errors in documents cause delays, so draft the LC carefully.
What is a letter of credit?
A letter of credit, also called a documentary credit, is a written promise from the buyer’s bank (the issuing bank) to pay the seller (the beneficiary) a set amount, provided the seller presents specified documents within a set time. The bank pays because the documents comply, not because it has seen the timber. Most letters of credit follow the ICC’s Uniform Customs and Practice for Documentary Credits, known as UCP 600.
How a timber LC works, step by step
- Contract: buyer and seller agree species, grade, volume, price, Incoterm, shipment date and payment by LC.
- Application: the buyer asks their bank to issue the LC, listing the documents required.
- Issue: the issuing bank sends the LC to the seller’s bank (the advising bank).
- Review: the seller checks the LC terms and asks for amendments if anything cannot be met.
- Production and shipment: the seller prepares the timber, has it inspected and ships it.
- Presentation: the seller presents the documents to the bank within the deadline.
- Checking: the banks check the documents against the LC terms.
- Payment: if the documents comply, the bank pays the seller, at sight or on a later date.
- Release: the buyer pays their bank and receives the documents to collect the timber.
Types of letter of credit
- Irrevocable: cannot be changed or cancelled without all parties agreeing. Under UCP 600, credits are irrevocable.
- Confirmed: a second bank, usually in the seller’s country or a major financial centre, adds its own promise to pay. This protects the seller from issuing bank or country risk.
- Sight: payment is made as soon as compliant documents are presented.
- Usance or deferred: payment is made a set number of days after shipment or presentation, giving the buyer credit time.
- Transferable: allows a trader to transfer part of the credit to the actual supplier.
Documents to require in a timber LC
- Commercial invoice: species, grade, volume, unit price, total, Incoterm.
- Packing list or specification: bundle numbers, sizes, pieces and volume per bundle.
- Bill of lading: full set of clean on-board bills, consigned as agreed.
- Certificate of origin: from the competent authority.
- Phytosanitary certificate: issued by the plant protection authority of the exporting country.
- Inspection certificate: from an independent inspection company, confirming species, grade, dimensions and volume.
- Insurance certificate: for CIF or CIP shipments.
- Export permits and CITES permits: where required for the species.
- Legality and certification documents: such as FSC certificates, if part of the contract.
Why an inspection certificate matters
Banks check documents only. If the seller loads the wrong species or poor grade, but the documents look right, the bank will still pay. That is why buyers should require an independent pre-shipment inspection certificate from a recognised company, stating species, grade, dimensions, volume and moisture content where relevant. See our timber inspection before shipment guide.
Common discrepancies in timber LCs
- Volume differences: the invoice shows 52.3 m³ but the LC allows only 50 m³. Use a tolerance such as “about” or plus or minus 5–10%.
- Late shipment: the bill of lading date is after the latest shipment date.
- Late presentation: documents presented after the deadline, often 21 days after shipment.
- Description mismatch: species or grade worded differently from the LC.
- Missing documents: a certificate not issued in time, such as a CITES or phytosanitary certificate.
- Wrong port: loading or discharge port differs from the LC.
Discrepancies do not always mean no payment, but they let the buyer refuse the documents or demand a discount, and they cause delays and fees.
How to draft a timber-friendly LC
- Allow a volume tolerance, because timber volumes vary slightly after final measurement.
- Allow partial shipments if the order will ship in several containers.
- Allow transhipment, as many West and Central African routes tranship.
- Give realistic shipment and expiry dates, allowing for drying, inspection and permits.
- Describe the timber simply and consistently, matching the contract.
- Avoid documents the seller cannot control, such as certificates from the buyer.
Costs of a letter of credit
LCs have bank fees for issue, advising, confirmation, amendments and discrepancies. Issuing fees are often a fraction of a percent of the LC value per quarter, with minimum charges. Confirmation fees depend on the issuing bank and country risk, and can be higher. Agree in the contract who pays which fees; a common rule is that each party pays the charges in its own country. Ask your bank for a fee schedule before you apply.
LC vs other payment terms
| Method | Buyer risk | Seller risk | Cost |
|---|---|---|---|
| Advance payment | High | Low | Low |
| Deposit + balance against copy documents | Medium | Medium | Low |
| Documentary collection (CAD) | Low to medium | Medium | Low to medium |
| Letter of credit | Low | Low | Medium to high |
| Open account | Low | High | Low |
Many buyers start with an LC for the first orders, then move to cheaper terms such as deposit and balance against documents once trust is built.
Timing
Open the LC early. Sellers usually start production, drying and permit applications once a workable LC is received. For kiln-dried timber or CITES species, allow at least 8–12 weeks between issue and latest shipment date. An LC with too short a validity causes amendments, which cost time and money.
Warning signs
Be careful with offers that ask you to send money outside the LC, pay “performance fees” to receive a credit, or accept unusual documents such as a “proof of product” from an unknown company. Genuine sellers present standard documents through banks. Our timber supplier scams guide explains other red flags.
LCs and CITES species
For CITES-listed timber such as padouk, doussie, bubinga and African mahogany, the export permit must be issued before shipment, and some importing countries also require an import permit. If the LC lists the CITES permit as a required document, make sure the shipment date allows enough time for the permit to be issued. Delays in permits are one of the most common reasons for LC amendments on exotic species. Our CITES timber species guide explains the process.
A sample LC timeline
A typical first order might run like this. Week 1: contract signed and LC wording agreed. Week 2: LC issued and advised to the seller. Weeks 3–8: timber cut, kiln dried and graded. Week 9: independent inspection and loading. Week 10: documents presented to the bank. Week 11: documents checked and payment made. Weeks 11–14: sea transit and arrival. Allow more time for CITES species, large volumes or special sizes. Building a realistic timeline into the LC dates avoids most amendments.
Using LCs with mixed containers
If one container holds several species, list each species and its volume separately on the invoice and packing list, and make sure the LC allows this. A simple description such as “sawn African hardwood as per proforma invoice”, combined with a detailed invoice, reduces the risk of mismatches. See wholesale hardwood lumber.
Who to talk to first
Before applying, speak with your bank’s trade finance team and share the draft wording with your seller. Ten minutes of review at this stage can save weeks of amendments later.
Common mistakes
- No volume tolerance: small differences cause discrepancies.
- No inspection certificate: the bank pays even if the timber is wrong.
- Short validity: production and permits take longer than expected.
- Inconsistent descriptions: species names and grades must match across all documents.
Our honest advice
For first orders and large contracts, a letter of credit is one of the safest ways to buy timber across borders. Draft it with your seller before you apply, include an independent inspection certificate, allow sensible tolerances and dates, and keep descriptions simple. Once you trust each other, you can move to cheaper payment terms.
Sources
Related guides
- FOB vs CIF timber
- How to import timber from Africa
- Phytosanitary certificate for timber
- African timber exporter
- Our export process
Frequently asked questions about letter of credit timber payments
Is a letter of credit safe for timber imports?
Yes, especially with an independent inspection certificate among the required documents.
Who pays the LC fees?
It is agreed in the contract; often each party pays the charges in its own country.
What is a confirmed letter of credit?
One where a second bank adds its promise to pay, reducing the seller’s risk.
How long should a timber LC be valid?
Long enough for production, drying, permits and shipment, often 8–12 weeks or more.
Discuss payment terms with us
Send us your species, volume, destination port and preferred payment terms through our quote form. We will reply with a quote and the LC wording we need.