Letter of Credit & Payment Terms in Chemical Trade

A container of menthol is loaded at Mundra Port. The bill of lading is issued. The exporter presents documents to their bank. And then — a discrepancy is found. The LC requires "Bill of Lading showing FOB Mundra" but the document says "FOB Nhava Sheva." The bank refuses payment. The buyer wants the goods. The exporter wants their money. Nobody talks for a week.

This is not unusual. Discrepancies occur in roughly 50–70% of LC presentations in chemical trade. Most are cured with amendments or waivers. But some are not — and those cost time, money, and trust.

This guide covers how payment terms work in chemical trade, with a focus on letters of credit, the most common instrument for international chemical transactions from India.

Payment Term Spectrum

From lowest risk for the buyer to lowest risk for the seller:

Letter of Credit: The Standard in Chemical Trade

Why LCs Dominate Chemical Trade

• Chemical shipments are high value (typically $25,000–$250,000 per container)
• Buyers and sellers often have no relationship history
• The product is commodity-grade and fungible — the seller needs payment assurance before releasing control
• Banks in both countries understand the documents and the process

Types of LCs

Sight LC

The most common for chemical trade. The issuing bank pays the exporter when compliant documents are presented. Payment typically settles within 3–5 banking days after presentation.

Timeline: Exporter ships → presents documents to bank → bank checks (up to 5 banking days) → pays

Usance / Time LC

The bank pays at a future date (30, 60, or 90 days after BL date or after sight). Used when the buyer needs time to sell the goods before paying.

Timeline: Exporter ships → presents documents → bank accepts → pays at maturity (e.g., 60 days from BL date)

Confirmed LC

A second bank (usually the exporter's bank or a major international bank) adds its confirmation — guaranteeing payment even if the issuing bank defaults. Used when:

• The issuing bank is in a country with political or economic instability
• The exporter wants to eliminate bank risk
• The buyer is unknown to the exporter's bank

Cost: 0.5–2.0% of LC value per year, paid by the party who requests the confirmation.

Revolving LC

Used for regular monthly shipments. The LC amount auto-renews after each shipment until expiry. Common for ongoing bulk chemical supply contracts.

Key LC Clauses for Chemical Trade

Latest Shipment Date vs Expiry Date

The LC always has two dates:

• Latest shipment date: The last day the goods can be loaded on board
• Expiry date: The last day documents can be presented to the bank

Documents must be presented within a certain period after shipment (typically 10–15 days for chemical shipments, or 21 days if not specified under UCP 600).

Allowed Tolerance

UCP 600 Article 30 allows:

• Quantity: ±5% if the LC does not specify a quantity in a fixed number of units
• Value: ±5% if the LC does not prohibit partial shipments

For chemical shipments, clarify this with your buyer. If the LC says "10 MT of menthol crystals," the 5% tolerance gives you 9.5–10.5 MT. Some buyers want exact quantities.

Latest Date for Presentation

UCP 600 default is 21 calendar days from the date of shipment. Many chemical LCs specify a shorter period (10–15 days). This matters because the exporter needs time to collect all documents from the shipping line, third-party inspector, and certifying authorities.

Partial Shipments

Most chemical LCs allow partial shipments. This is important if you are shipping multiple containers from different production batches.

Transshipment

If your chemical route requires transshipment (e.g., Mundra → Colombo → Rotterdam), confirm the LC allows it. Some LCs prohibit transshipment.

Documentary Requirements for Chemical LCs

The Standard Seven Documents

Most chemical LCs require:

1. Commercial Invoice — in original, signed

2. Bill of Lading — full set of 3/3 originals (or telex release with LC provision)

3. Packing List — detailed weights and marks

4. Certificate of Origin — issued by Chamber of Commerce or FIEO

5. Certificate of Analysis — from manufacturer or third-party lab

6. Insurance Certificate (for CIF shipments) — in negotiable form

7. Beneficiary Certificate — certifying that one set of documents was sent to the buyer

Chemical-Specific Requirements

Some LCs add:

• Phytosanitary Certificate — if wooden packaging is used
• Fumigation Certificate — for certain packaging materials
• Free Sale Certificate — for regulated markets
• Health Certificate — for food-grade chemicals
• Weight Certificate — from an independent surveyor (SGS, Bureau Veritas)
• Radioactivity Declaration — required by some Middle Eastern countries

Ten Most Common LC Discrepancies in Chemical Trade

Based on real LC rejections involving chemical shipments from India:

1. Late presentation — Documents presented after the LC's presentation deadline

2. COA date after shipment date — The COA should be dated before or on the shipment date

3. Invoice description does not match LC — Minor wording differences ("Menthol Crystals BP" vs "Menthol Crystals USP")

4. Bill of Lading not marked "On Board" — Received-for-shipment BL is not acceptable

5. Packing list weight discrepancies — Net weight differs between invoice and packing list

6. Missing shipping marks — The LC requires marks on packages and they are absent or wrong

7. Insurance document issues — Coverage value below 110% of CIF, or missing endorsements

8. Certificate of Origin not issued by the required authority — LC requires Chamber of Commerce but exporter used FIEO

9. Bill of Lading showed as "Carrier" when LC required "Master of Vessel" — Wording mismatch

10. Expired or missing signatures — Documents unsigned or signed by unauthorized persons after LC expiry

Alternatives to LCs

TT (Telegraphic Transfer) / Wire Transfer

• 100% TT Advance: Exporter receives full payment before production. High risk for buyer. Used for trial orders (under $10,000).
• 30% advance + 70% against BL copy: Common for chemical trade. The buyer pays 30% to start production, 70% upon receiving BL copy.
• TT after shipment: Buyer pays upon receiving goods. Risky for seller. Only for long-term relationships.

DP (Documents Against Payment)

The shipping documents are released to the buyer only upon payment. The exporter retains control of the goods until payment is made. Simpler and cheaper than LC (no bank undertaking), but the buyer has no recourse if documents are non-compliant.

Open Account

The buyer pays after receiving the goods (e.g., net 30, net 60 days). Standard for intragroup transfers and mature supplier-buyer relationships. Requires the exporter to have strong credit management and the buyer to have payment discipline.

Decision Framework: Which Payment Term?

Practical Tips for LC Management

For Exporters (Indian chemical manufacturers)

1. Review the LC draft before accepting. Get a draft from the buyer's bank before you start production. Mark up discrepancies and request amendments.

2. Do not ship on a provisional LC. If you ship before receiving the LC amendment, you ship at risk.

3. Prepare documents in parallel. Start assembling documents while the cargo is in transit. Do not wait until the BL arrives.

4. Use a checklist. Compare each document against the LC terms before presentation. One discrepancy can delay payment by 10–15 days.

5. Negotiate discrepancies. If a discrepancy is minor, ask the buyer to issue a waiver letter. Most buyers agree.

For Importers (Buyers of Indian chemicals)

1. Keep the LC simple. Every unusual requirement (certified by X authority, signed in blue ink, showing specific clauses) is an opportunity for discrepancy.

2. Specify the document requirements exactly. "COA signed by Quality Manager" is better than "COA from manufacturer."

3. Allow reasonable presentation time. 15–21 days from BL date is tight. If your port is remote and courier services are slow, ask for 21–30 days.

4. Instruct your bank clearly. Provide a side letter confirming the LC matches your purchase order terms.

5. Monitor expiries. If you need to extend the LC, do it at least 7 days before expiry.

Cost Comparison

Frequently Asked Questions