Trade Finance and Letters of Credit: A Guide for Taiwan Exporters

Every export transaction carries payment risk: the risk that the overseas buyer does not pay, pays late or disputes the invoice. For Taiwan exporters selling to US buyers — whether B2B wholesale or FBA brand transactions — understanding and mitigating payment risk is fundamental to sustainable export operations.

Payment methods ranked by risk to the exporter (safest to riskiest): advance payment, confirmed irrevocable letter of credit, documentary collection (D/P), open account with credit insurance, open account without insurance. Most US B2B transactions run on open account terms (net 30-60 days), which transfers the most risk to the exporter.

A letter of credit (LC) is a commitment by the buyer's bank (issuing bank) to pay the exporter, provided the exporter presents compliant shipping documents. The key advantage: payment depends on document compliance, not the buyer's willingness or ability to pay. For large B2B transactions with new US buyers, an LC dramatically reduces payment risk.

Common LC types for Taiwan exporters: (1) Irrevocable LC — cannot be cancelled without all parties' consent. Always request irrevocable. (2) Confirmed LC — a second bank (typically a Taiwanese bank) also guarantees payment. Best for buyers in countries with high political or transfer risk. (3) Sight LC — payment on presentation of compliant documents. (4) Usance (deferred) LC — payment at a set number of days after document presentation (e.g. 60 days sight).

A documentary collection (D/C) is less secure than an LC but more secure than open account. The exporter's bank sends shipping documents to the buyer's bank with payment instructions. Under Documents against Payment (D/P), the buyer pays before receiving documents. Under Documents against Acceptance (D/A), the buyer accepts a bill of exchange (commits to pay at a future date) and receives documents to clear customs.

Documentary collections are appropriate when you have established trust with the buyer, the transaction value is moderate, and the buyer's country has stable banking systems. For new US relationships, D/P provides reasonable security at lower administrative cost than a full LC.

Export credit insurance protects exporters against non-payment risk on open-account transactions. Taiwan's Sinopac Exporter Trading Finance, Mega Bank and Cathay United offer export credit insurance products. The Taiwan Export-Import Bank (TEIB) also provides buyer credit insurance covering political and commercial risk.

Typical coverage: 80-90% of invoice value for commercial risk (buyer insolvency, refusal to pay), plus 90-95% for political risk (transfer restrictions, expropriation). Annual premiums range from 0.2-1.5% of covered turnover depending on buyer country and buyer credit rating.

Taiwan Export-Import Bank offers: (1) Export credit guarantee — guarantees repayment to commercial banks that provide export financing to Taiwan exporters. (2) Export factoring — purchase of export receivables at a discount, providing immediate liquidity. (3) Foreign exchange risk insurance — covers exchange rate losses on export contracts.

SME Taiwan exporters can access EXIM programmes through partner commercial banks. The Taiwan government's Bureau of Foreign Trade (BOFT) maintains information on available export promotion and financial assistance programmes.

LC non-compliance (discrepancies between the documents submitted and the LC terms) is the most common reason for delayed or refused payment on LCs. Common discrepancies: shipping date outside LC validity, incorrect goods description on invoice, packing list quantities not matching invoice, bill of lading not clean, late presentation of documents.

Before executing an LC shipment, review the LC terms with your freight forwarder and export documentation specialist. Prepare a document checklist and verify each element against LC requirements before submitting to the bank. First-presentation compliance rates above 95% are achievable with proper preparation.