Documentary Credits under UCP 600 & ISBP 821
Plain-English summaries of the key UCP 600 articles, grouped and cross-referenced for document examination.
How a letter of credit works, step by step
- 1. Sales contract. Buyer and seller agree to pay by letter of credit and list the documents required.
- 2. Application. The buyer (applicant) asks its bank to issue the credit.
- 3. Issuance. The issuing bank sends the credit, normally as a SWIFT MT700 message, to a bank in the seller's country.
- 4. Advice. The advising bank checks that the credit is authentic and passes it to the seller (beneficiary).
- 5. Shipment and documents. The seller ships and prepares the invoice, transport document, insurance and any certificates exactly as the credit requires.
- 6. Presentation and examination. The documents go to the nominated or issuing bank, which checks them against the credit.
- 7. Payment. If the documents comply, the bank pays at sight or at the agreed later date, and the buyer receives the documents to collect the goods.
The key point is that banks deal with documents, not goods: payment depends on presenting complying documents on time, not on the condition of the cargo.
Who is who in a documentary credit
| Party | Role |
|---|---|
| Applicant | The buyer who asks for the credit to be issued. |
| Beneficiary | The seller who is paid under the credit. |
| Issuing bank | The buyer's bank, which gives the payment undertaking. |
| Advising bank | A bank in the seller's country that authenticates the credit and passes it on, without promising to pay. |
| Confirming bank | A bank that adds its own undertaking to pay, so the seller no longer depends only on the issuing bank and its country. |
| Nominated bank | A bank authorised in the credit to pay, accept or negotiate against the documents. |
Key fields of the SWIFT MT700 message (22)
| Tag | Field | What it contains |
|---|---|---|
| :27: | Sequence of Total | Sequence of the message and total number of messages (e.g. 1/1). |
| :40A: | Form of Documentary Credit | Specifies whether irrevocable, transferable. All credits are irrevocable by default under UCP 600 Art 3. |
| :20: | Documentary Credit Number | Unique reference allocated by issuing bank. Omission on docs is not discrepancy under ISBP 821 Preliminary viii). |
| :31C: | Date of Issue | Issuance date of the credit. Documents may be dated prior to this date but not after presentation date. |
| :31D: | Date and Place of Expiry | Latest date for presentation and the place (city/country) where presentation must be made. |
| :50: | Applicant | Party on whose request credit is issued. Invoice must be made out in this name (ISBP A17(b)). |
| :59: | Beneficiary | Party in whose favour credit is issued. Invoice must appear to be issued by this party. |
| :32B: | Currency Code, Amount | Currency and drawing limit. '$' alone valid for USD credit per ISBP 821 C7. |
| :39A: | Percentage Credit Amount Tolerance | Positive/negative tolerance on amount (e.g. 05/05). Default bulk tolerance is +/-5% per Art 30(b). |
| :41A/D: | Available With... By... | Specifies nominated bank and availability: BY PAYMENT, BY ACCEPTANCE, BY NEGOTIATION, BY DEFERRED PAYMENT. |
| :42C: | Drafts at... | Tenor of drafts (e.g. AT SIGHT, 60 DAYS AFTER BL DATE). Drafts cannot be drawn on applicant (ISBP B18). |
| :42A/D: | Drawee | Bank upon which drafts are to be drawn. Must be a bank, not applicant. |
| :43P: | Partial Shipments | ALLOWED or PROHIBITED. Default is allowed if not specified. |
| :43T: | Transhipment | ALLOWED or PROHIBITED. In multimodal, transhipment will occur (Art 19). |
| :44E: | Port of Loading / Airport of Departure | Port/Airport where goods are to be taken on board. |
| :44F: | Port of Discharge / Airport of Destination | Port/Airport of arrival for goods. |
| :44C: | Latest Date of Shipment | Latest permitted on-board / flight / dispatch date. |
| :45A: | Description of Goods and/or Services | Invoice description must correspond. Other docs may show general terms (Art 14(e)). |
| :46A: | Documents Required | Stipulates documents (Invoices, B/Ls, Insurance, Origin Certs, Packing Lists). |
| :47A: | Additional Conditions | Special clauses. Pure administrative conditions (e.g. non-stapling) cannot cause refusal (ISBP ix)). |
| :48: | Period for Presentation | Days after shipment date for presentation. Default is 21 calendar days if not stated. |
| :49: | Confirmation Instructions | CONFIRM, MAY ADD, or WITHOUT. |
Letters of credit are issued between banks as SWIFT MT700 messages. Check each field against the sales contract as soon as the credit is advised.
Types of letter of credit
- Sight credit — paid when complying documents are presented.
- Deferred payment or acceptance credit — paid at a later date, such as 90 days after shipment, giving the buyer credit.
- Confirmed credit — carries a second bank's payment undertaking; common when the issuing bank or country is a risk.
- Transferable credit — lets an intermediary transfer all or part of the credit to its own supplier.
- Back-to-back credit — a second, separate credit issued on the strength of the first, often used by traders.
- Standby letter of credit — a guarantee-like credit that is drawn only if the applicant fails to pay or perform.
Check every document against the credit with the ISBP 821 document examination guide, which also summarises the key UCP 600 deadlines. For the insurance document, see the cargo insurance portal; to compare with other ways of getting paid, see the trade finance directory.
Frequently asked questions
Is every letter of credit irrevocable?
Under UCP 600 a credit is irrevocable even if it does not say so: once issued, it cannot be changed or cancelled without the agreement of the beneficiary and the banks involved.
What is the difference between an advised and a confirmed letter of credit?
An advising bank only checks the credit is genuine and passes it on. A confirming bank also promises to pay, so the seller is protected if the issuing bank cannot or will not pay.
What is an MT700?
The SWIFT message format used to issue a documentary credit. Its numbered fields, such as :45A: for the goods and :46A: for the documents, set out every condition of the credit.
What is the difference between a letter of credit and a documentary collection?
In a letter of credit a bank promises to pay against complying documents. In a documentary collection banks only pass documents in exchange for payment or acceptance, without any promise to pay.
Who pays the letter of credit charges?
It is agreed in the credit: often each party pays its own bank's charges, but confirmation and amendment fees can be large, so agree them in the sales contract.