A letter of credit removes a large part of the human factor from payment. But only if the letter of credit itself has been checked properly.
The buyer no longer has to “mature” into making payment every time, and the seller does not have to explain that the goods have been shipped, the documents are ready, and payment is due. There is a banking mechanism: the L/C terms, a set of documents, and a simple logic.
✅ Documents comply - the bank pays.
❌ Documents do not comply - and the parties enter the genre for which people later start reading small print very carefully.
The buyer asks its bank to issue an L/C in favour of the seller. The bank fixes in advance what exactly the seller must present for payment: which documents, within which deadlines, with which dates, wording, goods description, quantity, quality, route and terms.
After shipment, the seller gathers the documents and presents them to the bank.
The bank does not reconstruct the whole commercial history. It does not read WhatsApp messages, restore commercial fairness, or guess what the parties “really meant”.
It does something more boring and far more dangerous: it checks the documents against the L/C terms.
✅ Match - payment. ❌ No match - discrepancies, and no payment until the buyer accepts them.
A letter of credit lives separately from the contract.
The contract may be perfectly negotiated and signed. But if payment is by L/C, the bank will look not at your contractual righteousness, but at the text of the L/C.
The contract explains the deal. The letter of credit opens or closes the door to the money.
The contract provides that gluten is to be determined by ISO 1 and the superintendent is SGS. The L/C, by mistake, refers to ISO 2 and Cotecna.
The seller receives the L/C, does not compare it with the contract, and proceeds with performance. SGS is nominated, documents are issued under ISO 1 - exactly as the contract says.
Commercially, everything may be correct. But for the bank that is not enough, because the L/C says something else.
A discrepancy appears. There is no money until the buyer accepts it. And whether the buyer accepts it is no longer a banking question. It is a question of market, price and bargaining position.
If the market has moved against the buyer, the buyer may suddenly become a very principled admirer of documentary precision.
The contract says that seven documents are required for payment. The L/C somehow asks for eight. Perhaps one document must be legalised, plus another certificate nobody focused on at contract stage.
The seller presents seven documents and can repeat forever: “But the contract says seven.” Yes. The contract says seven. But the payment instrument asked for eight, with legalisation.
The bank pays not according to fairness, but according to documentary compliance.
An L/C must not be read as a boring banking appendix to the contract. It must be read as a separate instruction manual for getting paid.
As soon as the L/C is received, check the goods description, quality and method of determination, superintendent, quantity and tolerances, shipment and presentation deadlines, document list, certificate wording, ports, dates, party names, partial shipment / transshipment, originals, copies, signatures and legalisation.
Not after loading. Not after the documents have already gone to the bank. Immediately.
If something does not match the contract, request an amendment.
A letter of credit reduces the human factor only after a human has properly checked the letter of credit. Otherwise it becomes a very neatly drafted way to discover how much the buyer wants to pay today.