A letter of credit is a bank's written undertaking to pay the exporter if the documents presented match the credit terms exactly. Payment depends on the documents, not on the goods themselves.
Who are the parties?
The applicant is the buyer who asks its bank to open the credit. The issuing bank makes the payment undertaking. The beneficiary is you, the exporter. An advising bank passes the credit to you, and a confirming bank, if requested, adds its own undertaking on top of the issuing bank's.
Why do documents matter so much?
Banks examine the documents, not the cargo. Under the widely used international rules for documentary credits, commonly known as UCP 600, the documents must comply with the credit terms on their face. A different spelling, a wrong description or a missing document can be treated as a discrepancy.
What should you check when you receive the credit?
Compare it with your sales contract line by line: names and addresses, goods description, amount, delivery term, port names, latest shipment date, expiry date and the period allowed for presenting documents. If anything differs from what you can deliver, ask for an amendment before you ship, not after.
Also look at which documents are required and who must issue them. A document you cannot obtain in time is a risk on its own.
A confirmed credit gives extra protection when you carry the country or bank risk of the issuing bank, but confirmation can carry its own cost. Decide whether to ask for it based on how well you know the buyer's bank and country. A pre-check of your documents with your advising bank before presentation also reduces the chance of a discrepancy.
Which mistakes are the most common?
Shipping late, presenting documents after the allowed period, inconsistent descriptions between the invoice, packing list and transport document, and an unclaused bill of lading assumed when the credit asks for something else. Prepare the documents against a checklist built from the credit.
Rules and bank practice can vary by case. Confirm with your customs broker or financial adviser before you act.