Letter of credit: paid against documents, not against delivery

A letter of credit is an undertaking by a bank to pay a seller once the seller presents documents that comply with the terms of the credit. It exists so that a buyer and seller who do not trust each other can trade anyway: the seller relies on the bank rather than the buyer, and the buyer knows the bank pays only against evidence that goods were shipped.

The rule that governs everything: banks deal in documents, not in goods. A perfect shipment with a flawed presentation is not paid. A compliant presentation is paid even if the buyer is unhappy with what arrived. Every frustration with letters of credit follows from that separation.

How a letter of credit works

1. Buyer and seller agree in the sales contract that payment will be by letter of credit, and agree what documents will be required.
2. The buyer asks its bank (the issuing bank) to issue the credit in the seller’s favour.
3. The credit is advised to the seller, usually through a bank in the seller’s country.
4. The seller checks the terms before shipping — this is the step most often skipped, and the last cheap moment to fix anything.
5. The seller ships and assembles the required documents.
6. The documents are presented within the presentation period and before expiry.
7. The banks examine them; if compliant, payment is made at sight or at the agreed maturity.

The documents that get presented

• Commercial invoice, matching the credit’s description of goods word for word.
• Transport document — commonly a bill of lading — showing shipment on or before the latest shipment date.
• Insurance document where the incoterm requires the seller to insure.
• Packing list, weight list or inspection certificate if the credit calls for them.
• A certificate of origin where the destination requires proof of where goods were made.
• Any beneficiary certificate the credit specifies, in exactly the wording it specifies.

Discrepancies are ordinary rather than exceptional: a large share of first presentations are rejected. The usual causes are mundane — the description of goods paraphrased instead of copied, a late shipment date, an expired credit, inconsistent weights between invoice and transport document, or a document simply missing.

Read the credit the day it arrives, not the day you ship. If it demands a document you cannot obtain, or wording you cannot reproduce, the fix is an amendment agreed with the buyer — which takes days. Discovering it at presentation costs the payment window.

Building the presentation pack

A presentation is a set of documents that must be internally consistent and consistent with the credit, assembled to a deadline. That is a document-control problem: one pack, several sources, one chance to submit. Ettex PDF assembles the invoice, transport document and certificates into a single ordered file, keeps the version that was actually presented, and leaves the earlier drafts where they belong — out of the pack.

Practically, teams that check presentations against a written list of the credit’s requirements — one line per document, one line per stated condition — catch far more than teams reading the credit afresh under time pressure.

Types worth distinguishing

• Irrevocable: cannot be amended or cancelled without every party’s agreement. Effectively all commercial credits are irrevocable today.
• Confirmed: a second bank adds its own undertaking, which matters when the issuing bank or its country carries risk.
• Sight versus usance: paid on presentation, or at a defined period after shipment or presentation.
• Transferable: the beneficiary can make the credit available to a second beneficiary, used by intermediaries.
• Standby: not a payment mechanism at all but a guarantee, drawn on only if the buyer fails to pay by other means.