The documentary letter of credit is still the workhorse of commodity trade finance, especially with new counterparties. Most LCs are issued under the ICC's Uniform Customs and Practice for Documentary Credits (UCP 600), which sets out how banks examine and honor documents. The principle is simple — the bank pays if the documents comply — and that is exactly where most problems start.
Before the LC is issued
Ask for the draft LC and check it against your sale contract. In particular:
- Names and addresses of applicant and beneficiary match the contract exactly.
- Amount and tolerance. If the contract allows a quantity tolerance, the LC amount should allow for it. Words such as "about" or "approximately" before the amount or quantity allow a 10% tolerance under UCP 600.
- Goods description is short and consistent with the contract — long descriptions create more opportunities for mismatch.
- Latest shipment date and expiry are realistic, with enough time after shipment to collect and present documents.
- Partial shipments and transhipment are permitted or prohibited consistently with how the cargo will actually move.
- Transport documents. Bulk cargoes often move under charter party bills of lading; if so, the LC must accept them.
- No non-documentary conditions. Requirements that can't be evidenced by a document ("vessel must not be older than…" without a required certificate) cause confusion. Ask for the matching document or remove the condition.
- Document list is achievable — every certificate, its issuer and the number of originals.
- Confirmation. If the issuing bank or country risk is a concern, ask for the LC to be confirmed by a bank you trust.
Before presenting documents
- Check every date — bill of lading, invoice, certificates and the latest shipment date.
- Check every figure — quantities and amounts must be consistent across all documents and within tolerance.
- Match the wording — goods description in the invoice should correspond to the LC.
- Endorsements and signatures — bills of lading endorsed as required, certificates signed by the named issuers.
- Present on time — unless the credit says otherwise, original transport documents must be presented within 21 calendar days after shipment, and always within the LC's validity.
The most common discrepancies we see
- Late shipment or late presentation
- Inconsistent quantities or weights between documents
- Missing or incorrect bill of lading endorsements
- Certificates issued by an entity other than the one named in the LC
- Invoices that don't match the LC goods description
Variations worth knowing
- Confirmed LC — a second bank adds its own payment undertaking, protecting you against issuing-bank or country risk.
- Transferable LC — lets an intermediary transfer part of the credit to its supplier, common in back-to-back commodity chains.
- Standby LC — a guarantee-style instrument that pays only if the buyer fails to pay on open-account terms.
How we work
On every trade we prepare a document matrix before the vessel loads, so certificates, dates and quantities line up the first time. If you'd like a second pair of eyes on a draft LC, talk to our trading desk.
