Payments
What letter of credit discrepancies really cost an exporter
The fees, the delay and the working capital behind each discrepancy, and how to bring the number down.
Contents
- A letter of credit only protects you if your documents comply. A discrepancy turns a bank's promise to pay into a request to the buyer.
- The bank fee is the smallest part of the cost. The delay and the risk to your payment are larger.
- Most discrepancies repeat. If you track them, you can remove most of them.
Why you chose a letter of credit
You asked for a letter of credit because you wanted certainty. The buyer's bank promises to pay you, as long as you present the right documents on time.
That promise has a condition. Under the rules most letters of credit follow (UCP 600), the bank checks your documents against the credit and against each other. It has up to five banking days to do this. If it finds a discrepancy, it no longer has to pay. It asks the buyer whether they will accept the documents anyway.
So a discrepancy does not just add a fee. It changes who decides whether you are paid.
The four costs of a discrepancy
1. The fee. Most issuing banks charge a discrepancy fee for each set of documents. It is usually deducted from your payment, so many owners never see it as a separate line. Your own bank may also charge for handling the returned documents.
2. The delay. The bank waits for the buyer to accept. A buyer who is busy, travelling or unhappy can take one week or three. If the documents must be corrected and presented again, add more time.
3. The working capital. While you wait, you have already paid your suppliers, your freight and your team. You are funding the shipment from your own money or from your packing credit. On a large shipment, a few weeks of delay costs real interest.
4. The risk. This is the cost owners forget. If prices have fallen, or the buyer has a cash problem, a discrepancy gives them a reason to ask for a discount, or to refuse. Your letter of credit has quietly become a collection.
Where discrepancies come from
They are rarely complicated. Common ones are:
- the description of goods differs from the credit
- the invoice, packing list and bill of lading show different weights or package counts
- the documents are presented late, or after the credit has expired
- the shipment date is after the latest date in the credit
- a document the credit asks for is missing, or is not signed as required
- the invoice amount is above what the credit allows
Notice the pattern. Almost all of these are mismatches between documents, or dates nobody was watching.
Bringing the number down
You do not need a specialist. You need three habits.
Read the credit before you ship, not after. Someone should list every document and every condition the day the credit arrives. If a condition cannot be met, ask the buyer to amend it now, while you still hold the goods.
Make every document from the same data. When each document is typed separately, they drift apart. When they all come from one shipment record, they agree.
Count your discrepancies. Keep a simple log: which shipment, which bank, which discrepancy, how many days of delay. After six months the same three or four causes will stand out.
How Expodite helps. Expodite records each letter of credit with its terms and dates, and plans on the latest shipment date, not just expiry. It works out the presentation window from the BL date and records every discrepancy the bank raises, so you can count them and see which ones repeat. Because every document is filled from the same shipment record, weights, descriptions and amounts match.
See how Expodite handles letters of creditQuestions to ask your team
- How many of our letter of credit presentations last year had a discrepancy?
- What did we pay in discrepancy fees, and how many days did each one delay payment?
- Who reads a new letter of credit, and when do they check its conditions?
- What were the three most common discrepancies?
- Has a buyer ever used a discrepancy to ask for a discount?
If nobody can answer the first question, start the log this week.
Quick answers
- What is a discrepancy in a letter of credit?
- A difference between your documents and the terms of the credit, or between two of your own documents. When the bank finds one, it is no longer bound to pay and asks the buyer whether to accept.
- How long does a bank take to check letter of credit documents?
- Under UCP 600, a bank has up to five banking days after the day of presentation to decide whether the documents comply.
- Who pays the discrepancy fee?
- Usually the exporter. The fee is normally deducted from the payment you receive.
This article is general information for Indian exporters. It is not legal or banking advice. Check the terms of each credit with your bank.
