For exporters, a letter of credit is an instrument that guarantees payment. But the guarantee is conditional: it holds only as long as the documents comply exactly with the LC terms. When that condition isn't met, the bank raises a discrepancy and payment is suspended.
A common misconception is that discrepancies stem from bank strictness. The reality is different: the vast majority arise from preventable document and text issues. And nearly all of them can be seen long before the moment of presentation.
Where discrepancies really come from
The sources of discrepancies fall into six main categories:
- Document inconsistency: Differences in goods description, quantity, amount, or party names across the commercial invoice, bill of lading, and insurance policy.
- Unmeetable condition: A clause in the LC text that is operationally impossible to fulfill.
- Deadline breach: Missing the latest shipment date or the presentation period.
- Missing or incorrect document: A required document not presented, or prepared incorrectly.
- Description mismatch: The goods description in the LC not matching the invoice.
- Confirmation and bank risk: No confirmation obtained on a transaction with a high-risk issuing bank.
Note that the first five are entirely document- and text-related — meaning they're fixable. The sixth is bank and country risk, reduced through the right routing. The common thread: the bank raising a discrepancy is the last step of the process, while the problem almost always originates much earlier.
Step 1: Review the text before you accept it
For an exporter, the most expensive mistake is accepting a letter of credit without reading it. Once the text is approved, every condition in it binds you. So the first and most effective measure is to review the text line by line before accepting it.
The review focuses in particular on:
- Document list (46A): Which document, how many copies, under what terms?
- Additional conditions (47A): Is there an operationally unmeetable clause?
- Shipment and presentation periods: Are they realistic and aligned with your logistics reality?
- Goods description (45A): Will it match your commercial invoice exactly?
Problems found at this stage are resolved with an amendment request sent to the counterparty. A correction at the text stage is far cheaper than a discrepancy at presentation.
Step 2: Assess confirmability from the start
When selling into high-risk issuing-bank, dollar-constrained markets, the LC alone is not enough security. If the issuing bank won't pay, the risk stays with the exporter.
The way to reduce this risk is confirmation: a second bank adding its payment guarantee to that of the issuing bank. On a confirmable transaction, payment risk shifts from the risky issuing bank to a strong confirming bank. The key point is to assess confirmability while the transaction is being set up — not when a deal goes wrong.
Step 3: Have the documents checked before presentation
Even with a flawless text, a single mismatch in the presented documents causes a discrepancy. So the final measure is to check the documents end to end before presenting them to the bank.
The pre-check compares the documents both against each other and against the LC terms:
- Consistency in amounts, quantities, dates, and party names
- Every required document and condition met
- Presentation and shipment periods not exceeded
- Goods description and delivery terms matching the invoice and bill of lading
If a mismatch is found, it's corrected before the documents reach the bank. The problem is solved before the bank can even raise a discrepancy.
Summary: a discrepancy is not a presentation problem, but a preparation problem
The key to preventing discrepancies is addressing them at the right stage. Instead of fighting a discrepancy at presentation, eliminate the risk early in three steps:
- Review and revise the text before you accept it.
- Assess confirmability while setting up the transaction.
- Have the documents checked before you present them.
These three steps remove the vast majority of discrepancies before they ever form. Zero discrepancies in an LC is not a matter of luck, but of preparation.
Have a letter of credit issued in your favor? See the risk before you accept it with a free assessment.