Letters of Credit for Produce Importers: What to Know

A letter of credit is the payment instrument most first-time importers are told to use, and it is genuinely the balanced choice: the US government's own ranking places it at low risk for both exporter and importer, better on that measure than cash in advance, documentary collections or open account. But it is also a documentary machine with hard deadlines, and on perishable cargo those deadlines interact badly with the goods.

This guide explains how the instrument actually works, what most often goes wrong, and the specific ways it strains on fresh produce.

The five parties

Two definitions from UCP 600, the ICC rulebook that governs, are worth knowing precisely. A credit is irrevocable by default: Article 3 states that a credit is irrevocable even if it says nothing on the point. And Article 1 makes clear that UCP 600 applies because the credit says it does, not because any law imposes it.

The two principles that explain everything else

Article 4 provides that a credit is a separate transaction from the sale contract, and that banks are in no way concerned with or bound by that contract. Article 5 provides that banks deal with documents and not with goods, services or performance.

Read together, these mean the bank will pay against conforming paper even if the goods disappoint, and will refuse against non-conforming paper even if the goods are perfect. Almost every surprise a first-time applicant experiences follows from those two sentences.

Sight or usance

A credit must state how it is available. Under a sight credit the bank pays on presentation of complying documents. Under a deferred payment or acceptance credit, usually called usance, payment falls due at a stated maturity, giving you a credit period after shipment.

One point buyers often miss: Article 7 provides that reimbursement for a complying presentation under a usance credit is due at maturity whether or not an intermediary bank discounted it early. Your exporter can be paid immediately by discounting while your own payment obligation still sits at the later date.

Confirmation, and who pays for it

Confirmation is a second, independent undertaking added by another bank. Exporters ask for it because of issuing-bank risk and country risk, not because they distrust you personally. Confirmation only exists once a bank actually adds it, so a credit that merely permits confirmation is not confirmed.

The mechanism is a single field in the SWIFT message that carries the credit. It takes three values: CONFIRM, meaning the receiving bank is requested to confirm; MAY ADD, meaning it can if it chooses; or WITHOUT. You control that field as applicant, and it determines both whether confirmation happens and who bears the fee.

Why most presentations are refused

The ICC Banking Commission, in a 2022 technical briefing on reducing discrepancy rates, estimated that the global proportion of documents refused on first presentation runs between 65 and 80 per cent. That is an ICC estimate rather than measured survey data, and it deserves its qualifier: refusal usually means delay and additional fees, not non-payment.

Where do the discrepancies come from? The ICC lists timing issues first, meaning expiry, shipment and presentation period, followed by poorly prepared documents and conflicting data between them. Notably, the ICC attributes the majority of problems to causes on the buyer's side of the transaction: poor drafting of the credit, outdated application forms, and a lack of understanding of how documentary credits work.

The deadlines

Count those against your transit time. A flawless presentation still absorbs the shipment date, document collation at origin, courier to the nominated bank, up to five banking days there, courier onward to the issuing bank, and up to five banking days again. On a Gulf route of seven to twelve days, the paperwork can lose the race to the ship.

Where letters of credit strain on fresh produce

Three provisions bite specifically on perishable cargo, and none of them is obvious from a generic trade finance guide.

• Article 27 requires a clean transport document, meaning one bearing no notation declaring a defective condition of the goods or their packaging. On produce, a carrier notation about wet or crushed cartons becomes a documentary discrepancy on top of a physical problem.
• A credit calling for a full set of original bills of lading is incompatible with telex release, which is how a great deal of short-haul perishable cargo actually moves. Originals must travel through the banking chain, and that chain is slower than the vessel.
• The phytosanitary certificate is a government-issued original from the exporting country's plant protection organisation. It cannot be reprinted on demand to cure a discrepancy, so an error on it is expensive in a way an invoice error is not.

The single most useful thing to know

Article 16 provides that when an issuing bank determines a presentation does not comply, it may in its sole judgement approach the applicant for a waiver of the discrepancies. That applicant is you.

In practice most discrepancies are resolved this way rather than by rejection. If you are told a presentation is discrepant and the underlying shipment is sound, waiving is usually faster and cheaper than insisting on correction, particularly when the goods are already deteriorating at a terminal. Knowing you hold that lever changes how the conversation with your bank goes.

The alternatives, honestly compared

For short-haul perishable trade specifically, many buyers settle on a partial advance with the balance against documents. It avoids the documentary cycle outrunning the vessel while still leaving something outstanding until shipment is evidenced.

Charges

There is no market rate. Charges are per bank, per transaction, and vary enormously between a global bank's Indian branch, an Indian public sector bank and a Gulf or European bank. One published example, Bank of America's India branch tariff, lists import credit issuance as a commitment charge of 0.15 per cent per month with a minimum, and a flat fee for general amendments. Treat that as one bank's schedule, not a benchmark.

Allocation between the parties is contractual, not legal. UCP 600 provides a fallback where charges cannot be collected from the party they were stated to be for, but who pays what is agreed in the credit. The ICC has itself observed that discrepancy fees are now treated by some banks as a revenue stream and are, in its words, perhaps being abused. Insist that any discrepancy fee is stated in the credit rather than discovered later.

For a first transaction

1. 1Draft the credit carefully, since the ICC identifies poor drafting as the leading cause of problems, and that is your responsibility as applicant.
2. 2Ask your supplier which documents they can actually produce before the credit is issued, not after.
3. 3Do not call for a full set of original bills of lading on a short route unless you have accepted the timing consequence.
4. 4Confirm with your bank that the documents demanded are consistent with the Incoterm agreed.
5. 5Allow realistic validity. US government guidance on paying Indian suppliers points to irrevocable credits with three to six months validity.
6. 6Agree in advance who pays which charge, including any discrepancy fee.

And for genuinely small first orders, consider whether the instrument is worth its overhead at all. A modest advance payment on a trial consignment often costs less in fees and delay than a documentary credit, and teaches you the same thing about the supplier.