In this article, guest contributor Xavier Fornt, Professor at the ESCI-UPF Higher School of International Commerce and Barcelona School of Management provides his essential tips in handling documentary credits without errors. He is also a member of the ICC Banking Commission.
The views and opinions expressed in this article are those of the author for education purposes and do not necessarily reflect the official policy or position of the ICC Academy or ICC.
Documentary credits are often considered the most appropriate solution for transactions where trust between the parties is low, payment amounts are high, or terms are extended. It is widely used in international trade to mitigate risk and ensure secure payments.
Despite its advantages, many exporters, importers, and financial institutions find that the usage of documentary credits come with problems. Although global statistics vary, approximately 65-80% of documentary credits have been refused by banks on first presentation, demonstrating discrepancies. However, these are often resolved quickly.
Read: ‘The role of practical, experience-based judgment in documentary credits’
So, are documentary credits a viable solution?
The answer depends on perspective – while some focus on its theoretical benefits, others experience its practical challenges. In reality, documentary credits can be a powerful tool when used correctly. Success lies in understanding both the theory and the practical nuances of its application.
Read: ‘Geopolitics, sanctions, and trade finance: Challenges for UCP 600 and documentary credits’
Navigate documentary credits successfully with these tips
| S/N | Tip | Takeaway |
|---|---|---|
| 1 | Use clear, simple language. | Avoid technical jargon that confuses document checkers. |
| 2 | UCP 600 applies to everyone. | Ensure all involved parties understand the rules. |
| 3 | Identify recurring discrepancies. | Track errors and correct them at the source. |
| 4 | Be diligent. | Documentary credit involves multiple parties – each depends on the other. |
| 5 | Be precise in your requests. | Ambiguity can lead to risks and delays. |
| 6 | Review credit conditions immediately. | Requesting modifications early can prevent issues. |
| 7 | Avoid last-minute actions. | Submit documents well in advance. |
| 8 | Know back-to-back vs transferable credits. | These are different credit types – don’t mix them up. |
| 9 | Issue bills of exchange only when required. | Unnecessary bills create complications. |
| 10 | Follow credit conditions for abbreviations. | Use them only if explicitly permitted. |
| 11 | Prepare new documents instead of correcting. | Amendments can cause unnecessary problems. |
| 12 | Use alphanumeric dates. | Prevent confusion between date formats (e.g. 05/09 vs 09/05) |
| 13 | Ensure proper signatures. | Sign in the correct sections to avoid discrepancies. |
| 14 | Sign invoices even if not required. | It’s a simple step that removes doubt. |
| 15 | Plan around banks’ five-day review period. | Consider this timeframe when shipping goods, |
| 16 | Clarify cost responsibilities. | Banks charge feed – agree on who pays for them. |
| 17 | Ensure documents are in the correct language. | This avoids customs clearance issues. |
| 18 | Keep credits separate from contracts. | Don’t attempt to bind them together. |
| 19 | All credit conditions must be document-based. | Avoid non-documentary requirements. |
| 20 | Understand SWIFT message fields. | Know how documentary credits are transmitted. |
| 21 | Set realistic document submission deadlines. | Goods and documents travel separately. |
| 22 | Train your entire team. | Sales and procurement must align on required documents. |
| 23 | Match goods descriptions exactly. | Prevent discrepancies with precise wording. |
| 24 | Specify banks involved. | Selecting them in advance reduces delays and costs. |
| 25 | Follow ICC’s International Standard Banking Practice (ISBP). | It complements UCP 600 and helps prevent errors. |
