A letter of credit is a bank''s promise to pay against documents, not against goods. The cargo can arrive perfectly and payment can still be refused because a description was worded differently on two pieces of paper. That gap between physical reality and documentary compliance is where letters of credit go wrong, and shipping documents cause a large share of it.
General explanation, not legal or banking advice. Letters of credit are governed by UCP 600 and by the specific terms of your own credit, which is the document that binds you.
The principle that catches people out
Banks deal in documents alone. They do not inspect cargo, verify quality or care whether the shipment arrived. If the documents you present conform exactly to the credit, the bank pays. If they do not, the bank may refuse — and then payment depends on the buyer agreeing to waive the discrepancy, which puts you at their mercy at exactly the moment your leverage is gone.
Strict compliance is the standard. Not substantial compliance, not obviously-the-same-thing compliance.
The discrepancies that actually occur
| Discrepancy | Why it happens |
|---|---|
| Goods description does not match | The invoice wording differs from the credit, even by a word or an abbreviation |
| Late presentation | Documents presented after the presentation period, commonly 21 days from shipment unless the credit says otherwise |
| Late shipment | The bill of lading on-board date is after the latest shipment date in the credit |
| Credit expired | Presentation after the expiry date, or at the wrong place |
| Claused bill of lading | The carrier noted damage or defective packing, so the bill is not clean |
| Inconsistent data | Weights, marks, quantities or party names differ between invoice, packing list and transport document |
| Missing document | A certificate of origin, inspection certificate or insurance document the credit required |
| Insurance shortfall | Cover below the required percentage, wrong currency, or dated after shipment |
Notice how many are created by the transport documents rather than the commercial ones. Your forwarder is a participant in getting paid, whether or not anyone has told them so.
Where shipping and finance collide
- The bill of lading must be clean. A carrier''s notation about damaged cartons breaks the credit as well as signalling a cargo problem. Packaging quality is therefore a payment issue — see export packaging.
- The on-board date is the shipment date. A rolled sailing can push you past the latest shipment date; see rolled cargo prevention.
- The document type must match. If the credit calls for a full set of originals, a seaway bill or telex release will not satisfy it — bill of lading types covers the difference.
- The Incoterm drives the document set. A CIF credit requires an insurance document; an FOB one generally does not. Check against the Incoterms responsibility chart.
- Transhipment and partial shipment may be prohibited by the credit while your routing assumes both.
Reduce the risk before the goods move
- Review the credit the day you receive it, not the week you ship. If a term is impossible — an unachievable shipment date, a document you cannot obtain — request an amendment immediately, while the buyer still needs the goods.
- Copy the goods description verbatim from the credit onto the invoice. Do not improve it, expand it or abbreviate it.
- Send the credit terms to your forwarder and ask them to confirm the transport document they will issue satisfies it. Most discrepancies are cheap to prevent and expensive to fix.
- Diarise all three dates — latest shipment, presentation period, expiry — and work back from the earliest.
- Build one consistent data set for party names, marks, weights and quantities, and use it across every document.
- Check the credit is workable at all. Terms requiring documents issued by the buyer, or by a party you do not control, hand them a veto over your payment.
If documents are rejected
The bank must notify refusal within the period allowed and state every discrepancy at once. From there you can correct and re-present if time remains, ask the buyer to waive, or fall back to a collection basis — which means giving up the bank''s payment undertaking. Time is the scarce resource, which is why the presentation period matters more than it looks: correcting a document takes days you may not have.
For lower-value or established relationships, weigh whether a credit is worth its cost and friction at all against securing payment another way — the trade-off sits alongside the Incoterm decision in DDP vs DAP vs FOB.
Find forwarders experienced with documentary credits on your lane, or post a request and say up front that the shipment is under a letter of credit.
