Notice. This page is educational and informational in nature. Nothing here constitutes financial, legal, or investment advice. Trade finance structures and bank policies vary by institution, jurisdiction, and market conditions. Any transaction remains subject to bank underwriting, KYC and AML checks, sanctions screening, and definitive documentation.
How to Finance the Import of Goods from China into the USA: Letters of Credit, Payment Terms, and What Your Bank Will and Will Not Do
If you are importing goods from China into the United States, you are navigating one of the most consequential trade finance environments in recent memory. Elevated tariffs have changed the landed cost calculation on almost every product category. US bank appetite for China-origin import finance has tightened materially since 2022. Chinese suppliers — many of whom have been burned by payment delays from US buyers — are increasingly insisting on letters of credit or upfront deposits rather than accepting open account terms.
The result is a growing number of US importers who have a supplier, a purchase order, and a customer — but cannot close the financing gap between placing the order and collecting the receivable. This guide is written for them.
- The payment method spectrum
- How letters of credit work for China imports
- Why US banks are tightening LC appetite
- How tariffs affect your financing requirement
- What to do when your bank says no
- Supply chain finance as an alternative
- Documentary collections explained
- Building toward an unsecured trade line
The Payment Method Spectrum for China Imports
Every China import transaction sits somewhere on a spectrum between maximum protection for the buyer and maximum protection for the supplier. Where your transaction sits determines both the financing structure you need and the working capital cost you will incur.
Most established US importers operate somewhere between documentary collection and open account with established suppliers. Most new or growing importers — and most importers dealing with new Chinese suppliers — are pushed toward letters of credit or cash in advance, precisely because the supplier carries more risk at the start of a relationship and wants the bank's payment guarantee that an LC provides.
The financing challenge for the buyer is greatest at the left end of the spectrum: cash in advance ties up working capital entirely. A letter of credit requires a cash margin deposit with the issuing bank. Documentary collection carries less financing cost but more payment risk. Open account and supply chain finance give the buyer the most working capital efficiency, but they are only available once the supplier trusts the buyer enough to extend terms.
How Letters of Credit Work for China Imports
A documentary letter of credit for a China import transaction works as follows. The US importer (the applicant) instructs their US bank (the issuing bank) to open an LC in favour of the Chinese supplier (the beneficiary). The LC specifies the exact documents the supplier must present to receive payment — typically a bill of lading, commercial invoice, packing list, certificate of origin, and any inspection or quality certificates required under the purchase contract.
The Chinese supplier ships the goods, collects the required documents, and presents them to their own bank (the advising or negotiating bank) in China. That bank forwards the documents to the US issuing bank. If the documents are compliant with the LC terms, the US bank pays. If the LC is a sight LC, payment is made immediately on compliant document presentation. If it is a usance LC, payment is deferred by a specified period — 30, 60, 90, or 180 days from shipment — giving the US importer time to receive, sell, and collect on the goods before paying the bank.
A Chinese supplier who has shipped goods to a US buyer on open account terms and then waited 90 days for payment — or not been paid at all — will insist on an LC for the next transaction. The LC gives the supplier a payment commitment from a US bank rather than a promise from a US buyer. For a first order, a large order, or a relationship where trust has not yet been established, the LC is the instrument that makes the trade possible for the supplier.
Sight vs Usance: Choosing the Right LC Type
The choice between a sight LC and a usance LC has a direct impact on the importer's working capital position. A sight LC requires the bank to pay as soon as compliant documents are presented — typically within five business days of document receipt. The importer must reimburse the bank immediately, before the goods have arrived, been inspected, or been sold. A usance LC defers payment, giving the importer a window to receive the goods and begin generating the cash flow to repay the bank. For most importers, a usance LC with a 60 to 90 day tenor is the most practical structure — long enough to receive and begin selling the goods, short enough for the supplier to find acceptable.
Why US Banks Are Tightening Their Appetite for China-Origin LCs
Several converging factors have made US commercial banks significantly more cautious about issuing import LCs for China-origin transactions over the past three years. Understanding these factors helps importers prepare a stronger application and identify when a non-bank alternative is the more practical route.
Geopolitical and Trade Policy Risk
US-China trade tensions, elevated tariffs, and the unpredictability of trade policy have made banks more cautious about transactions that are highly sensitive to policy changes. A tariff increase announced between the LC issuance date and the goods arrival date can materially change the economics of the transaction and increase the risk that the importer will struggle to reimburse the bank. Banks with conservative risk teams have responded by either raising margin requirements or reducing their China-origin LC appetite entirely for certain goods categories.
Enhanced Compliance Requirements
US sanctions, export control regulations, and anti-money laundering requirements have added significant compliance overhead to China-related trade finance transactions. Banks must screen Chinese beneficiaries, their ultimate beneficial owners, and in some cases their supply chains against an expanding range of restricted party lists. For banks without dedicated China trade compliance teams, the easiest risk management decision is to apply higher margin requirements or decline transactions that require extensive screening.
Goods Category Sensitivity
Electronics, semiconductors, solar panels, telecommunications equipment, and certain industrial goods from China are subject to enhanced scrutiny under US export control and national security frameworks. Banks that issue LCs for these goods categories assume compliance risk as well as credit risk, and many have reduced their appetite accordingly. If your goods fall into a sensitive category, expect higher margin requirements, more extensive documentation requests, and in some cases outright refusal regardless of your financial standing.
What This Means in Practice
An importer who could open a $500,000 LC against a 20 percent margin deposit with their bank in 2021 may face a 50 percent margin requirement or a requirement for full cash collateral for the same transaction in 2026. The credit has not deteriorated. The bank's appetite for the transaction type has. Knowing this changes the strategy: the solution is not a better loan application to the same bank — it is finding a lender whose appetite for China-origin trade finance has not contracted in the same way.
How Tariffs Affect Your China Import Financing Requirement
Tariffs on China-origin goods are not just a cost line — they change the entire working capital structure of an import transaction. Most importers focus on the tariff as a percentage of the goods value and underestimate the compound effect on the cash they need to have available before the goods clear customs.
The key number in this example is $296,750 — nearly 60 percent of the invoice value — that must be available before the goods can be sold. For an importer with $200,000 in available working capital, this transaction cannot close without additional financing regardless of how creditworthy the business is. The tariff payment alone ($125,000) is a cash outflow that most import finance structures do not fund directly, because it is a customs duty payment rather than a trade finance instrument. Importers who do not plan for this in their working capital cycle consistently find themselves unable to clear goods at the port.
LC facilities and import finance lines fund the invoice value of the goods. They do not fund the tariff payment at customs. If your goods carry a significant tariff, you need a separate working capital facility — an overdraft, a revolving credit line, or a short-term loan — to cover the duty payment while the goods are being cleared and sold. Failing to plan for this is the most common reason growing importers get caught short at customs.
What to Do When Your Bank Will Not Issue the LC
A US bank declining to issue an LC for a China-origin import — or quoting a margin requirement that is commercially prohibitive — is not the end of the transaction. It is the beginning of a search for a lender whose appetite matches the transaction. These are the genuine options.
Several banks operate in the US market with a specific focus on trade finance rather than broad commercial banking. These institutions have deeper China trade relationships, more experienced trade finance underwriting teams, and margin requirements that are calibrated to the specific transaction rather than applied as a blanket policy. For importers who have been declined by a general commercial bank, a specialist trade finance bank is almost always worth approaching with the same transaction.
Private credit funds, trade finance companies, and alternative lenders have filled a significant portion of the gap left by bank appetite contraction in China-origin trade finance. These providers are not subject to the same regulatory constraints as banks, can apply more flexible underwriting criteria, and can structure LC facilities with lower margin requirements for importers with demonstrated trading history. The cost is typically higher than a bank facility, but the availability is substantially greater.
Not all US banks have tightened their China trade finance appetite equally. Regional banks with strong Asian trade corridors, banks with significant Chinese-American customer bases, and banks with dedicated trade finance desks have maintained more appetite than large general commercial banks with conservative credit committees. The same transaction that one bank declines may be straightforward for another. The answer is lender selection, not application improvement.
If the LC is the obstacle, explore whether the supplier will accept a documentary collection instead. Under a documents against payment (D/P) collection, you still pay before you can collect the goods, but the bank is acting as an intermediary rather than guaranteeing payment — and there is no cash margin requirement. This only works if your supplier is willing to accept the higher payment risk of a collection versus an LC, which typically requires an established relationship.
If your bank will issue the LC but the margin requirement is too large to cover from operating cash, explore whether the margin deposit can be funded by a short-term loan secured against your receivables, inventory, or other business assets. The LC provides the supplier payment guarantee; the separate facility funds the margin deposit. The net cost is the interest on the margin loan plus the LC issuance fee, which may be significantly lower than the working capital cost of not completing the trade.
An advisor with active relationships across bank and non-bank trade finance lenders can match your transaction to the lender whose current appetite and margin policy is best aligned with your specific goods category, trade route, and financial profile. The bank you approached first is not the only lender in the market — it is the one you happened to have a current account with.
Supply Chain Finance: The Working Capital Alternative
If your relationship with your Chinese supplier is established enough that they trust your payment, supply chain finance is one of the most powerful working capital tools available to a US importer. Instead of paying the supplier in 30 days and carrying the cash flow burden, a supply chain finance programme lets you extend your payment terms to 90 or 120 days while your supplier receives payment within days of invoice approval.
The mechanics are straightforward. You approve the supplier's invoice as payable. A finance provider — a bank or non-bank SCF platform — pays the supplier promptly at a small discount. You repay the finance provider at your extended payment terms, 90 or 120 days later. The supplier gets early payment without factoring risk. You get extended terms without damaging the relationship.
- Supplier insists on 30-day payment terms.
- You pay $500,000 within 30 days of shipment.
- Goods arrive 25 to 35 days after shipment.
- You have 0 to 5 days to sell before payment is due.
- Working capital tied up for the full inventory cycle.
- Pressure on supplier relationship if payment is delayed.
- You approve supplier invoice; SCF provider pays supplier within 2 to 5 days.
- You repay SCF provider at 90 to 120 days from invoice date.
- Goods arrive, are sold, and receivables are collected before payment is due.
- Supplier relationship strengthened by reliable early payment.
- Working capital freed for other orders or operating costs.
- SCF cost is the discount rate on the supplier payment: typically 1 to 3% per annum.
The limitation of SCF is that it requires the supplier to agree to the programme and to accept the discount on early payment. For larger US importers with significant volume leverage over their Chinese suppliers, this is achievable. For smaller importers with limited volume, the supplier may not find the early payment discount attractive enough to justify the administration of joining the platform.
Documentary Collections: The Middle Ground
A documentary collection sits between an LC and open account. The exporter ships the goods and hands the shipping documents to their bank with instructions. The exporter's bank forwards the documents to the importer's bank with a payment instruction. The importer's bank releases the documents either upon payment (documents against payment, or D/P) or upon acceptance of a time draft (documents against acceptance, or D/A).
The critical difference from an LC is that the bank makes no payment guarantee. If the importer refuses to pay or accept the draft, the bank has no obligation to pay the exporter. The exporter's goods are stuck at the port in the importer's country with no automatic remedy. This is why documentary collections are appropriate for established relationships rather than first orders, and why many Chinese suppliers are unwilling to accept them for new buyers.
| Feature | Letter of Credit | Documentary Collection (D/P) |
|---|---|---|
| Bank payment guarantee | Yes — issuing bank commits to pay on compliant documents | No — bank is a document intermediary only |
| Cash margin required from buyer | Yes — typically 10 to 100% of face value | No — no margin deposit required |
| Cost to buyer | Issuance fee plus margin opportunity cost | Collection fee only — typically $150 to $400 |
| Risk to supplier | Low — bank payment obligation is unconditional on compliant docs | High — buyer can refuse payment and goods are stranded |
| Appropriate for | New relationships, large orders, high-value goods, new suppliers | Established relationships with trusted buyers and good payment history |
| Supplier acceptance | Widely accepted; often required by Chinese suppliers for new buyers | Accepted only by suppliers who trust the buyer's payment history |
Building Toward an Unsecured Import Finance Line
The long-term solution to the margin problem is not finding a cheaper margin requirement on every transaction — it is building the banking relationship and financial track record needed to qualify for an unsecured import LC facility where no cash margin is required. This takes time, but every transaction completed on a cash margin basis is evidence for the future facility application.
- Complete transactions consistently and document them Every China import LC you open and settle cleanly — on time, with compliant documents, no disputes, no extensions — builds the repayment track record your bank needs to reduce or eliminate the margin requirement. Keep records of every transaction: LC number, value, tenor, goods type, settlement date, and any issues that arose and how they were resolved.
- Provide financial statements proactively and regularly Banks reduce margin requirements when their credit assessment of the applicant improves. Submit updated audited accounts as soon as they are available every year. Add management accounts and a trading commentary if the business has grown materially since the last audit. Do not wait to be asked.
- Consolidate your banking relationship Move your operating accounts, payroll, and FX transactions to the bank that issues your LCs. A bank that sees your full cash flow pattern is in a much better position to reduce your margin than one that only interacts with you when you need an LC. Relationship depth is what converts a transactional margin requirement into a credit-based facility.
- Request a formal trade finance facility review after 12 to 24 months Once you have a track record of 10 to 20 completed transactions, formally request a review of your LC terms with the objective of establishing an unsecured or partially secured import LC facility. Prepare a brief credit memo covering your business overview, import volume history, financial performance, and the facility you are requesting. Come with numbers, not just a request.
- Diversify your sourcing geography If your bank's reduced appetite is driven specifically by China country risk, consider whether diversifying part of your sourcing to Vietnam, Bangladesh, India, or other markets reduces the bank's concern and improves the terms available on your China-origin LCs. A bank that sees you reducing China concentration is more likely to be flexible on the transactions that remain.
Frequently Asked Questions
-
It depends on your supplier relationship, order value, and available working capital. For established suppliers, open account or documentary collection may be viable. For new suppliers or large orders, a documentary letter of credit provides the strongest payment security for both parties. For large recurring orders with trusted suppliers, a supply chain finance programme can extend your payment terms significantly while ensuring the supplier is paid promptly.
-
US banks have tightened their China-origin LC appetite due to elevated geopolitical and trade policy risk, enhanced compliance and due diligence requirements under US sanctions and AML frameworks, increased scrutiny of Chinese counterparties, and general tightening of trade finance credit. The practical consequence for importers is higher cash margin requirements, more demanding financial documentation requirements, and in some cases outright refusal for certain goods categories.
-
Tariffs directly increase the total cash required before goods can be sold. The LC margin deposit covers the invoice value; the tariff payment at customs is a separate cash outflow that most import finance structures do not fund directly. For a $500,000 shipment with a 25 percent tariff and a 30 percent LC margin requirement, the total cash required before goods are available for sale is nearly $300,000 — well above what most importers plan for when they focus only on the LC margin requirement.
-
The options are applying to a specialist trade finance bank or non-bank provider with lower margin requirements, negotiating with the supplier to accept a documentary collection instead of an LC, using a supply chain finance programme to extend payment terms, arranging a separate short-term loan to fund the margin deposit, or engaging a trade finance advisor to identify lenders with confirmed appetite for your specific transaction profile. The bank's margin requirement reflects that institution's appetite — a different lender may apply materially different terms to the same transaction.
-
A documentary collection is a payment mechanism where the exporter's bank sends shipping documents to the importer's bank with instructions to release them upon payment or acceptance of a time draft. Unlike an LC, the bank makes no payment guarantee — it acts only as an intermediary. The cost to the buyer is much lower as no margin deposit is required, but the risk to the supplier is higher because the buyer can refuse to pay and the goods are stranded. Documentary collections are appropriate for established relationships with trusted payment history.
-
A supply chain finance programme allows a US importer to extend payment terms to 90 or 120 days while the Chinese supplier is paid promptly by the finance provider. The importer approves the invoice, the finance provider pays the supplier quickly at a small discount, and the importer repays the provider at the extended due date. This improves the importer's working capital by deferring payment without damaging the supplier relationship. It works best for importers with sufficient volume leverage to persuade suppliers to join the programme.
If you are importing from China and your current bank cannot provide the LC facility your supplier requires — or is quoting a margin requirement that is tying up too much working capital — submit your transaction details for a review. We identify the right lender for your specific goods category, trade route, and financial profile, and manage the process from application to issuance.
Get StartedDisclosure. FG Capital Advisors is not a bank or direct issuer of letters of credit. Services are delivered on a best-efforts advisory basis through third-party banks and capital providers and remain subject to bank underwriting, KYC and AML checks, sanctions screening, legal review, and definitive documentation. Nothing on this page constitutes legal, financial, or investment advice.
