Why documentary credit remains relevant for importing SMEs
When a Swiss SME purchases goods or components abroad, the supplier often requires payment guarantees before shipment. Advance bank transfer exposes the buyer to the risk of not receiving the goods; payment on delivery may be unacceptable to the exporter. Documentary credit — also known as a letter of credit (L/C) — bridges this gap: the buyer's bank commits to paying the supplier only if they present documents that comply with the contract (commercial invoice, bill of lading, certificates).
For importers with moderate volumes and commercial relationships still being established, documentary credit offers a balance between contractual security and access to bank credit. However, it involves recurring costs, liquidity constraints and accounting that goes beyond simply recording a bank transfer. Approximate management can erode import margins and create surprises at year-end closing.
This guide explains how documentary credit works in the Swiss context, the bank costs to budget for, the impact on cash flows and accounting entries compliant with Swiss accounting standards (FER/GAAP), with practical examples for SMEs.
How a documentary letter of credit works
Documentary credit follows the international UCP 600 rules (Uniform Customs and Practice for Documentary Credits), adopted by Swiss banks. The typical flow involves four parties: the importer (applicant), the importer's bank (issuing bank), the supplier's bank (advising or confirming bank) and the exporter (beneficiary).
Phase 1 — Opening and confirmation
The importer requests their bank to open an L/C in favour of the foreign supplier, specifying the amount, expiry date, required documents and shipping conditions (Incoterms). The bank may require a collateral deposit or a dedicated credit line.
If the supplier requires greater security, the foreign bank may request confirmation: a second bank guarantees payment. Confirmation involves an additional cost but reduces country risk.
Phase 2 — Shipment and document presentation
The exporter ships the goods and presents the documents specified in the L/C to their bank within the agreed deadlines. The bank verifies formal compliance — not the quality of the goods — and forwards the documents to the Swiss issuing bank.
Any discrepancies (dates, quantities, descriptions) block payment until the importer waives them or a correction is made. This is why precise drafting of L/C conditions is crucial.
Phase 3 — Payment and customs clearance
Upon receipt of compliant documents, the issuing bank debits the importer's account and transfers the amount to the beneficiary. In parallel, the importer initiates customs clearance with the FOCBS: customs duties and import VAT, collected upon entry into the customs territory; VAT is recoverable under the effective method if the company is registered for VAT, whereas under the net tax rate method a separate deduction is generally not available.
The goods enter warehouse or a transit account; the purchase cost includes the agreed FOB/CIF price, transport costs, duties and bank charges attributable to the purchase.
Phase 4 — Closure and any disputes
Once payment is executed, the L/C is closed. If the goods arrive defective or not in line with contractual specifications, the importer must act on the commercial relationship with the supplier — the bank does not intervene on quality matters.
For this reason, many SMEs combine pre-shipment inspection (SGS, Bureau Veritas) with clear contractual clauses, rather than relying exclusively on the L/C as a quality guarantee.
Documentary credit vs other import payment methods
Before opening an L/C, it is worth comparing it with the most common alternatives among Swiss importing SMEs:
| Criterion | Documentary credit (L/C) | Advance bank transfer | Documentary collection (D/P, D/A) | Open account |
|---|---|---|---|---|
| Buyer protection | High — payment linked to compliant documents | Low — full risk if the supplier does not ship | Medium — document control, but payment to the bank | Low — established commercial trust |
| Supplier acceptance | High — recognised international standard | Variable — often rejected by new suppliers | Medium | High only with established relationships |
| Bank costs | High (fixed fees + % of amount) | Low (SWIFT transfer cost only) | Moderate | Minimal |
| Liquidity impact | Medium-high — collateral deposit or credit commitment | Immediate — advance cash outflow | Upon document delivery | Deferred (30–90 days) — better for cash |
| Operational complexity | High — drafting conditions, document verification | Low | Medium | Low |
| Ideal for | First orders, distant suppliers, imports > CHF 50'000 | Micro-orders, samples, trusted suppliers | Recurring imports with intermediary banks | Mature commercial relationships, regular flows |
Bank costs: what to budget in the import budget
Documentary credit costs directly affect the purchase cost of goods. An SME importing CHF 200'000 annually with L/Cs may incur CHF 3'000–6'000 in bank charges, depending on the bank, the supplier's country and negotiated conditions.
| Cost item | Order of magnitude | Operational notes |
|---|---|---|
| Opening commission | 0.1% – 0.3% of amount (min. CHF 150–300) | Charged at opening; negotiable with recurring volumes |
| Negotiation commission | 0.1% – 0.2% per quarter of validity | Proportional to L/C duration |
| Bank confirmation | 0.1% – 0.5% per annum on amount | Mainly required for suppliers in high-risk countries |
| Amendments and waivers | CHF 50–150 per event | Each correction to the conditions generates a charge |
| SWIFT correspondence charges | CHF 20–40 per message | Communications between banks in the international network |
| Collateral deposit (margin) | 10% – 100% of L/C amount | Not a cost, but ties up liquidity in the account |
| Interest on bank advance | SARON + 1% – 3% per annum | If the bank finances payment beyond the credit line |
Practical tip: negotiate an annual package with your bank if you expect multiple recurring L/Cs. Always request a written quote before opening and include an "import bank charges" line item in your standard landed cost calculation, so you do not erode your sales margin.
Impact on cash flows and financial planning
Documentary credit alters the cash outflow curve compared with an open account purchase. Even if payment occurs only upon presentation of documents, the bank may require a collateral deposit from opening — typically between 10% and 30% for clients with a good credit history, up to 100% for new SMEs or imports from high-risk countries.
Furthermore, between L/C opening and actual arrival of the goods, 30–90 days may elapse. During this period the importer bears a financial commitment that is "invisible" in the income statement, but clearly visible in the balance sheet and working capital requirements.
Typical timeline of an L/C import
- Day 0: L/C opening — collateral deposit blocked
- Day 7–14: goods shipped by supplier
- Day 21–35: document presentation and payment
- Day 30–45: customs clearance — duties + import VAT
- Day 35–50: goods delivered to warehouse
- Day 60–90: goods sold and customer receipts
The cash gap between payment to the supplier and receipts from sales can exceed 60 days. Plan a liquidity reserve or a dedicated trade credit line.
Indicators to monitor
- L/C outstanding: total amount of open L/Cs not yet paid
- Blocked bank margin: collateral deposits frozen in accounts
- Import days payable outstanding (DPO): average days between supplier payment and receipts
- Landed cost vs budget: variance between actual cost (including duties and bank charges) and forecast
- Credit line utilization: percentage of import credit line used
Integrate these indicators into your monthly treasury reporting to anticipate peak funding requirements.
Accounting in compliance with Swiss accounting standards
Documentary credit transactions require entries covering the entire cycle: contingent commitment, payment, customs clearance and recognition of purchase cost. Below is the typical accounting scheme for an SME applying the Code of Obligations with accounting in Swiss francs.
1. Opening the letter of credit
At opening, no liability to the supplier is recorded (the goods have not yet been purchased). The contingent commitment arising from the L/C must be disclosed in the notes to the financial statements (Art. 959c para. 2 no. 10 CO); many SMEs also track it in off-balance-sheet accounts or in a memorandum ledger. In parallel, the collateral deposit ties up liquidity: the bank account decreases and a transit account "restricted collateral deposits" is opened in current assets.
| Transaction | Debit account | Credit account |
|---|---|---|
| 20% collateral deposit on CHF 100'000 L/C | 1170 Collateral deposits | 1020 Bank |
| Contingent L/C commitment (disclosure in notes) | Active L/C commitments | Counter-commitment L/C |
| L/C opening commission (CHF 250) | 6900 Bank charges | 1020 Bank |
2. Payment upon presentation of documents
When the bank executes payment, the purchase is recorded (for example in goods in transit) with the cash outflow and the contingent commitment disclosed in the notes is closed. If the goods are still in transit, use a "Purchases in transit" or "Goods in transit" account (transit account in assets).
| Transaction | Debit account | Credit account |
|---|---|---|
| L/C payment CHF 100'000 | 3000 Goods in transit | 1020 Bank |
| Use of collateral deposit | 1020 Bank | 1170 Collateral deposits |
| Closure of contingent L/C commitment | Counter-commitment L/C | Active L/C commitments |
3. Customs clearance and recognition of purchase cost
Upon arrival at customs, record customs duties and import VAT, calculated on the taxable base including customs value and duties. VAT is deductible under the effective method via the VAT return; under the net tax rate method a separate deduction is generally not available, as input tax is already considered on a flat-rate basis in the net tax rate. Final purchase cost includes goods price, transport, insurance, duties and attributable bank charges.
| Transaction | Debit account | Credit account |
|---|---|---|
| Customs duties CHF 2'400 | 3000 Goods in transit | 1020 Bank |
| Import VAT 8.1% on CHF 102'400 | 1171 Import VAT | 1020 Bank |
| Transfer to warehouse | 1200 Goods warehouse | 3000 Goods in transit |
Reporting and notes
In the notes to the financial statements, disclose the total amount of open L/Cs at year-end, restricted collateral deposits and available import credit lines. This information is relevant for banks, investors and auditors assessing the financial position. With Accountex you can associate each L/C with a cost centre or import project, tracking bank costs and variances against the budgeted landed cost.
Common mistakes and how to avoid them
L/C conditions too strict or too vague
Generic goods descriptions, overly tight expiry dates or excessive document requirements cause delays and amendment costs. Draft the conditions with the supplier before opening and have them reviewed by the bank.
Omitting bank charges from purchase cost
Recording L/C commissions only as general expenses distorts product margin. Allocate them to the goods in transit or warehouse account, in proportion to the amount, for a correct purchase cost.
Failure to disclose contingent commitments in the notes
Open L/Cs at year-end represent significant financial obligations. Omitting them from the notes to the financial statements (Art. 959c para. 2 no. 10 CO) understates financial risk and may lead to auditor comments.
Underestimating cash requirements
Not considering the collateral deposit and VAT-customs timing in cash flow forecasting leads to bank overdrafts. Plan at least 120% of the L/C amount as total liquidity requirement (payment + duties + VAT).
Operational checklist for your first L/C
Before opening your first documentary letter of credit, verify each point:
- 1Signed commercial contract with supplier, with clear Incoterms (recommended: FOB or CIF with Swiss port of destination)
- 2Import credit line activated with the bank, with defined conditions and limits
- 3L/C conditions agreed in writing with the supplier (documents, deadlines, quantity tolerance ±5%)
- 4Complete bank cost quote and inclusion in landed cost calculation
- 5Updated cash plan with collateral deposit, L/C payment, duties and import VAT
- 6Chart of accounts configured: goods in transit, collateral deposits, import VAT, bank charges
- 7Internal procedure for document verification and communication with bank and forwarder
- 8Disclosure in notes to the financial statements of contingent commitments from active L/Cs (Art. 959c para. 2 no. 10 CO)
Conclusion: a useful tool, but one that requires rigorous management
Documentary credit remains an effective tool for Swiss SMEs importing from foreign suppliers, especially in early commercial relationships or towards distant markets. It offers buyer protection and credibility with the supplier, but imposes significant bank costs, liquidity constraints and detailed accounting that goes beyond a simple bank transfer.
Integrating L/C management into the treasury cycle and inventory accounting — with cost tracking per transaction, recording contingent commitments in the notes and monitoring landed cost — allows you to benefit from documentary credit without compromising margins and liquidity. Accounting software such as Accountex facilitates this control, linking bank movements, customs entries and inventory valuation in a single workflow.