Disadvantages of Letter of Credit (LC)
1. Not Suitable for All Transactions: LCs might not be the best option in all situations, particularly if the buyer and seller have an established connection and level of confidence.
2. Possibility of Fraud: Although LCs are intended to offer security, fraud can still occur, thus parties should proceed with caution and proper investigation.
3. Time-Consuming Process: LC agreements may not be appropriate for transactions that need to be processed quickly because they need the creation, examination and approval of documents by banks.
4. Lack of Direct influence: As the LC is a bank-to-bank transaction, the seller has little direct control over the process and it may take some time to settle any complaints.
5. Cost and Complexity: Setting up an LC can be difficult because there are fees and charges associated with confirmation, issuance and amendment.