Letters of credit: the discrepancies that stop payment

The mechanism: a bank pays paper, not produce

When a buyer's bank issues a letter of credit, it is making an independent promise to pay a stated amount, on stated terms, provided the exporter presents documents that comply exactly with what the credit specifies. That promise is separate from the underlying sales contract. The bank examining the documents does not inspect the cargo, does not call the buyer to ask if the shipment looks right, and generally will not exercise judgment about whether a mismatch is trivial. It checks paper against paper: does the invoice match the credit, does the bill of lading match the invoice, does the packing list match both. This is usually described as the doctrine of strict compliance, and it exists because international banking rules built the credit as a paper-based instrument on purpose, so that a bank in one country can examine a presentation from an exporter it has never met without needing to independently verify anything about the transaction itself.

The practical consequence is that strict compliance protects the bank's willingness to pay quickly, but it does nothing to protect the exporter from its own paperwork. Banks routinely reject on what looks, from the shipper's side, like trivial detail: a comma out of place in a company name, a shipped-on-board date that lands one day after the credit's latest shipment date, a description of goods that uses a synonym instead of the exact wording the credit specifies. None of that changes what is inside the container. All of it can stop payment.

Why banks reject on what looks like trivia

The examining bank's incentive is not to be difficult, it is to avoid taking on risk it did not agree to. If it pays against documents that do not strictly comply and the issuing bank later finds a genuine discrepancy, the paying bank can be left holding the funds with no right to reimbursement from the issuing bank. That risk allocation is why examiners check literally, not contextually, and why 'obviously the same company' or 'clearly a typo' does not survive the review. A worked example: a credit calls for the beneficiary's name as 'Meridian Produce Exports Pte Ltd.' The commercial invoice reads 'Meridian Produce Export Pte Ltd,' missing the 's.' To the exporter this is a typo. To the examiner it is a discrepancy, because the invoice does not match the credit exactly, and the examiner's job is to compare strings, not to infer intent.

This is also why using different people to prepare different documents is a common failure mode. If the freight forwarder types the bill of lading, the exporter's own office types the invoice, and a third party fills out the certificate of origin, three independently-typed versions of the same buyer name, goods description, and shipping marks will drift from each other in small ways almost every time. The fix is not more careful typing, it is a single source document that every other document is built from, so the same string of text propagates instead of being retyped.

The discrepancies that recur

Late presentation happens when documents reach the bank after the deadline the credit sets for presentation following shipment, commonly a fixed number of days after the bill of lading date. An exporter who ships on time can still be late on documents if the forwarder is slow to issue the bill of lading or the exporter waits on a certificate of origin before assembling the set.

An expired credit is the same problem at the transaction level: the credit itself carries an expiry date and a place for presentation, and documents that arrive after that date are outside the credit's validity regardless of when the goods shipped. Exporters sometimes track the shipment date closely and lose track of the credit's own clock, particularly when a shipment slips and the exporter does not go back and check whether the delay has pushed presentation past expiry.

Documents inconsistent with each other is the single most common discrepancy category in practice: the invoice states one gross weight, the packing list states another; the bill of lading lists a different number of packages than the packing list; the insurance certificate references a shipment date that does not match the transport document. Each document might independently look correct, the discrepancy only shows up on cross-comparison, which is exactly what the examining bank does and what an exporter assembling documents in a hurry often skips.

Description of goods not matching the credit is a strict-wording problem: the credit specifies goods 'as per proforma invoice number 4471,' and the commercial invoice describes them slightly differently, using a grade, variety, or packaging term that is accurate but not identical to the credit's own language. Banks are not required to accept a description that means the same thing, only one that reads the same.

Missing or wrong endorsements catch exporters on order bills of lading and on insurance documents. An order bill of lading made out 'to order' generally needs the shipper's endorsement, and if the credit requires the document to be endorsed to a named party or endorsed in blank and that endorsement is missing, the presentation is short a required element even though the bill of lading itself is otherwise correct.

Insurance amount short comes up when the credit specifies coverage at a percentage above the invoice value, commonly used to cover the buyer's anticipated profit margin as well as the goods, and the exporter's certificate insures only the invoice value itself. The shortfall is a fixed, checkable number, which makes it one of the easier discrepancies for a bank to catch and one of the easier ones for an exporter to avoid by reading the credit's insurance clause before binding cover.

Transport document not evidencing the required shipment date arises when the credit sets a latest shipment date and the bill of lading's on-board notation, not just its issue date, falls after that date. A vessel delay that pushes actual loading past the deadline the credit allows produces a document that is accurate about what happened and non-compliant anyway, because the credit's deadline did not move with the vessel.

Prevention starts before the credit is issued

The highest-leverage moment in the entire process is before the credit is issued at all. Buyers typically send a draft credit, or the exporter can ask for one, before instructing their bank to open it formally. At that stage, unworkable terms cost nothing to fix: a request for documents the exporter cannot actually produce, an unrealistic latest shipment date given the buyer's own production or harvest calendar, a required certificate from an inspection body the exporter has no relationship with, or a description of goods that does not match how the exporter's own paperwork is generated. Once the credit is issued and confirmed, changing any of that requires an amendment, which needs the buyer's cooperation, the issuing bank's action, and time, all three of which get harder to secure the closer the shipment gets to its own deadline.

A useful discipline is to read the draft credit the way the examining bank will read it: line by line, checking every field against what the exporter's actual shipping and documentation process can produce, not against what it should in theory be able to produce. If the credit calls for a certificate of analysis issued by a specific named laboratory and the exporter normally uses a different one, that gap needs to be raised and resolved before issuance, not discovered during document preparation with the ship already loaded.

Building the checklist and controlling the timeline

The document checklist for a specific shipment should be built from the credit itself, field by field, not from a standing template kept on file. A standing template captures what a typical credit requires; it will not catch the one clause in this particular credit that asks for something unusual, and it is exactly the unusual clause that produces a discrepancy. The practical method is to go through the credit's document list one line at a time, note the exact wording it specifies for the goods description, the beneficiary name, the consignee, and any special endorsement or certification language, and then check every document being prepared against that same wording before assembly, not after.

Controlling the presentation timeline means working backward from the credit's presentation deadline and its expiry date, not forward from the shipment date. If the credit allows a fixed number of days after the bill of lading date to present documents, and a certificate of origin or inspection certificate routinely takes several days to obtain from the issuing body, that lag has to be accounted for before booking the shipment, not discovered afterward when the clock is already running. Building slack into the schedule for the slowest document in the set, usually a third-party certificate rather than anything the exporter controls directly, is what keeps a routine shipment from becoming a late presentation.

What happens on a discrepancy, and what is left

A discrepancy does not mean the exporter loses the sale or the payment automatically. It means the issuing bank's obligation to pay on presentation is gone, and what remains is a negotiation from a weaker position. The examining bank will typically notify the exporter of the discrepancies found, and from there several paths are open, though which ones are available depends on timing and on the buyer's cooperation. The exporter can correct and re-present the documents if there is still time before the credit's expiry and the presentation deadline. The bank can be asked to approach the issuing bank and, through it, the buyer, for a waiver of the discrepancy, since the buyer is often willing to accept a minor mismatch it does not actually care about, particularly on a long-standing trading relationship. Documents can be forwarded to the issuing bank on a collection basis instead, meaning payment happens only if and when the issuing bank and buyer choose to pay, which removes the credit's payment guarantee and turns the transaction into an open-account-style collection. In every one of these paths, the exporter has lost the one advantage a letter of credit is supposed to provide: payment that does not depend on the buyer's ongoing willingness to pay. That is the real cost of a discrepancy, not necessarily lost money, but a lost guarantee, replaced by a negotiation the exporter did not choose to be in.