Nagpur, Maharashtra, India
Payment Terms
How a documentary letter of credit works, what makes a presentation discrepant, and how buyers structure a credit that can actually be complied with.
Introduction
A documentary letter of credit is a bank undertaking to pay the seller against compliant documents. It substitutes the issuing bank's credit standing for the buyer's, which is why it is common in first transactions between new counterparties.
Crucially, banks deal in documents, not goods. Payment follows a compliant presentation, so the wording of the credit determines whether the transaction runs smoothly.
Explanation
The buyer instructs their bank to issue a credit in the seller's favour. The credit lists the documents required, the latest shipment date, the expiry date, and the terms of the underlying shipment.
The seller ships, assembles the documents and presents them. If the presentation complies with the credit, the bank pays according to the credit's availability — at sight or at a stated tenor.
Discrepancies are usually clerical: a description that differs from the credit, a missing original, a late presentation, an expired credit or an inconsistency between documents.
Every discrepancy hands the decision back to the buyer, which delays payment and can damage a new relationship over an avoidable typing error.
Share the draft credit wording with the seller before issuance. A five-minute review of the document clause prevents most discrepancies.
Keep the required documents to those that genuinely exist and can be obtained within the timeline, and allow a realistic presentation period after shipment.
Step by Step
The sequence our trade desk follows with buyers, from requirement to shipment.
Confirm in the contract that payment is by documentary credit, and whether it is at sight or on a deferred tenor.
Prepare the credit text with your bank and share the draft with the seller for review before issuance.
Your bank issues the credit and advises it to the seller through the advising bank.
Shipment happens on or before the latest shipment date, with documents prepared to the credit's requirements.
Documents are presented within the presentation period, and payment follows a compliant presentation.
Common Mistakes
Most discrepancies originate in credit wording that no one checked against reality before issuance.
Dates that ignore sourcing, inspection and vessel schedules guarantee amendments and extra bank charges.
If a required certificate does not exist in the exporting country, the credit cannot be complied with.
The credit governs payment against documents. Quality, inspection and remedies live in the sales contract.
Buyer Checklist
FAQ
Answers to the questions buyers raise most often on this topic.
Continue Exploring
Every guide links into the specifications, corridors and trade support pages it references.
Share your commodity, grade, volume, packaging and destination port. You receive a specification sheet and a commercial offer, not a generic price list.
This guide lives in Payment Terms within the Agri Genius Exports Knowledge Hub. Permalink: /knowledge/payment-terms/letter-of-credit-explained/
