A bill of lading and a letter of credit are completely different documents that serve unique purposes. These two documents are linked in that they are both commonly found in international trade transactions. Knowing the difference between a bill of lading and a letter of credit can help you to understand the import/export industry and the international trade process.
A bill of lading is a document listing and detailing all of the goods in a shipment of any kind, whether by land, sea or air. Sellers of goods print a bill of lading that details the product types, quantities, prices, weights and any other factors important to the distributor and the buyer. The seller then signs the bill of lading and attaches it to the shipment as it is passed off to the distributor, assuming the seller uses a third-party distributor.
The shipping company can use the bill of lading to double check that all goods are accounted for. Although shippers generally cannot check the contents of containers, like boxes or pallets, they can check the number and type of containers present in the shipment.
When the buyer receives the shipment, an employee can use the bill of lading to ensure that all items on the bill are present in the shipment and to compare the list of shipped goods against the buyer's purchase records to ensure all purchased goods are included in the bill. The buyer can then use the bill of lading as an official receipt for the transaction.
A letter of credit is essentially a promise made by one bank to another that the first bank's customer can be relied upon to pay for goods after they have been received. In practice, a buyer from one country asks his bank to send a letter of credit to the seller's bank in another country. This assures the seller that he can ship the goods to the buyer with a measure of financial security, since the letter of credit requires the buyer's bank to cover the payment if the buyer defaults. This is a form of private industry regulation. Since there is no international authority with the power to enforce trade rules across countries, the banking industry relies on letters of credit to provide protection to international businesses.
Letters of credit and bills of lading represent two distinct steps in a single process. After making a deal for an international transaction involving a physical shipment, the buyer initiates a letter of credit. Once the seller's bank accepts the letter, the seller can draft a bill of lading and ship the goods.
Companies create bills of lading themselves, either by creating them from scratch or using a template packaged with an office productivity software package. Bills of lading can take a wide range of forms, as long as all relevant information is included.
Letters of credit are drafted and sent by the buyer's bank. The purchaser in the transaction must simply contact the bank, request a letter of credit be initiated and provide information about the transaction, the seller and the seller's bank.