Payment is against papers, not against goods
A letter of credit is a bank’s undertaking to pay: if you present, within the deadline, documents that comply exactly with what the credit requires, the bank pays. Regardless of what happens between you and your customer.
The key word is exactly. Banks do not check the goods: they check papers. A description with one different word, one document too many or too few, a date outside the deadline, and that is a discrepancy. With a discrepancy the bank is no longer bound and goes to ask your customer for permission — which is precisely the situation the credit existed to avoid.
So the real work is not in presenting: it is in reading the text the day it arrives and asking for the necessary amendments before producing and shipping.
How it works
- It is agreed in the contractThe type of credit, who pays each bank’s charges and which documents will be required. That is agreed there, not when the text arrives.
- The buyer’s bank issues itIn your favour, with terms setting out documents, deadlines, ports, description of the goods and the latest shipment date.
- You receive it and review itThrough your bank. If there is anything you cannot comply with, an amendment is requested from the applicant. This step decides whether the credit works.
- You ship and assemble the documentsExactly the ones it asks for, with the wording it asks for. Not one more, not one fewer.
- You present within the deadlineThere is a presentation period running from the shipment date — twenty-one days by default — and an expiry date for the credit. Whichever falls first applies.
- The bank examines and paysIt has a period to examine the documents. If they are compliant, it pays or undertakes to pay at maturity. If it finds discrepancies, it notifies them.
What to look at the day the text arrives
Half an hour here saves weeks of delay later. If there is anything you cannot comply with, the amendment is requested before producing.
- Is it irrevocable? Is it confirmed by a bank in my country if the destination risk warrants it?
- Is the description of the goods one I will be able to put on the invoice, word for word?
- Is the latest shipment date realistic given production lead time and sailing schedules?
- Does the presentation period give me time to assemble the transport originals?
- Are the ports of loading and discharge correct, and does it allow transhipment if my routing has one?
- Does it allow partial shipments, if I am going to send in two lots?
- Can I issue or obtain every document it requires myself?
- Is there any document that depends on my customer? If there is, the credit does not protect me.
- Who pays each bank’s charges, and was that what we agreed?
The most frequent discrepancies
| Discrepancy | How it is avoided |
|---|---|
| Documents presented out of time | Counting the period from the shipment date, not the invoice date |
| Description different from the credit’s | Copying and pasting the credit’s text into the invoice |
| B/L without the “shipped on board” notation | Asking for it in the shipping instructions |
| B/L with reservations about the condition of the goods | Checking the packaging before handing over at the terminal |
| A required document missing | Making a literal list of the terms and ticking them one by one |
| Presented amount higher than the credit’s | Respecting the tolerances the credit allows, if it allows any |
What turns a guarantee into a problem
- Accepting the text without reading it and starting productionBy the time you discover you cannot meet a condition, the goods are made and amending the credit depends on your customer being willing.
- Relying on an unconfirmed credit in a risky countryWithout confirmation, the party bound is the issuing bank. If the risk is the country, that bank is precisely in the country at risk.
- Presenting on the last dayIf there is a curable discrepancy, with no margin there is no way to correct it before expiry.
- Thinking the credit guarantees qualityIt guarantees payment against papers. Conformity of the goods is guaranteed by the contract and, if anything, by an agreed inspection.