Letters of credit and the payment risk spectrum

The short answer

Every payment method for a cross border sale splits the risk between the two sides in a different way. At one pole the seller ships first and hopes to be paid. At the other the buyer pays first and hopes the goods arrive as described. The instruments in between move that exposure from one party toward the other.

A letter of credit carries a bank's own promise to pay. That promise is the reason people use it, and also the source of its most common misunderstanding. Under the current rules, a bank that issues a credit deals with documents, not with the goods. Article 5 of UCP 600 states it plainly: "Banks deal with documents and not with goods, services or performance to which the documents may relate." If the documents the exporter presents match the terms of the credit, the bank pays, whatever is inside the container.

That means a letter of credit is not a quality guarantee. ICC Academy, the training arm of the International Chamber of Commerce, puts it directly: a letter of credit "does not protect the importer against the exporter shipping inferior quality goods /or a lesser quantity of goods or potential fraud." The credit protects the payment mechanism, not the contents of the shipment. Checking the goods is a separate job, done before the vessel sails, which is why a pre-shipment inspection belongs alongside the payment terms rather than inside them.

This is one of the payment method pages under payment terms, and it looks at the instruments from the buyer's side. How the money reaches the Brazilian exporter, and what Brazilian currency rules require once it lands, is covered in how a Brazilian exporter gets paid.

The risk spectrum, from open account to cash in advance

ICC Academy lays the instruments out as a single line. At one end the seller is most exposed, at the other the buyer is. The ordering below follows that source.

Instrument	For the seller	For the buyer
Open account	Worst position: ships and invoices, paid later on trust	Best position, described as maximum flexibility
Documentary collection, D/A	Weak: documents released against the buyer's acceptance of a draft, payment falls due later	Time to inspect the documents before accepting the draft
Documentary collection, D/P	Documents released only against immediate payment	Pays at sight to get the documents
Unconfirmed letter of credit	A bank promise to pay against complying documents	Obliged to pay on complying documents even if the goods are poor
Confirmed letter of credit	Best position: a second bank's promise added to the first	Of the instruments that oblige payment against documents, the one it is most comfortable with
Cash in advance	Best position: paid before shipping	Worst position: pays before anything ships

Two notes on this table. ICC Academy does not give formal definitions of open account or cash in advance, so they appear here as positions on the spectrum rather than defined terms. And the ranking is a general one about relative exposure, not a recommendation: the right point on the line depends on how much each side trusts the other and what the trade is worth.

How a letter of credit works, and the rules behind it

A documentary credit is a written undertaking by a bank, the issuing bank, to pay the exporter (the beneficiary) once the exporter presents documents that comply with the terms the buyer set. The credit is independent of the sale contract it rests on. Article 4 of UCP 600: "A credit by its nature is a separate transaction from the sale or other contract on which it may be based." A dispute about the goods does not, by itself, stop the bank paying against compliant documents.

The current rulebook is UCP 600, the 2007 Revision, ICC Publication No. 600, in force since 1 July 2007. There is no later revision. This matters as a working test, because ICC has publicly warned that a "UCP 700" does not exist. Anyone quoting a "UCP 700" credit is either mistaken or running something worth a much closer look. Two companion publications sit with UCP 600 without replacing it. Electronic presentation is handled by eUCP Version 2.1, ICC Publication No. 823E, which supplements UCP 600 and takes priority only where the two conflict. Examination practice is set out in ISBP, ICC Publication 821, the 2023 edition, meant to be read together with UCP 600.

A few timings and principles from the text of UCP 600 shape how a credit runs in practice.

Rule	UCP 600 article	What it means
Banks deal in documents, not goods	Article 5	Payment turns on paperwork, not on the cargo
The credit is separate from the sale contract	Article 4	A contract dispute does not automatically block payment
Time to examine a presentation	Article 14(b)	A maximum of five banking days after presentation
Time to present transport documents	Article 14(c)	No later than 21 calendar days after shipment, and not after the credit expires
Refusal for discrepancies	Article 16	A single notice listing each discrepancy, within the five day window

Article 16 carries a sting for the bank. To refuse documents for discrepancies, it has to give one notice listing every discrepancy, within that five banking day window. A bank that gets the procedure wrong loses the right to claim the documents were discrepant at all.

What a letter of credit does not cover

The honest limit of the instrument is worth returning to, because a lot of buyers assume the opposite. A complying presentation gets the exporter paid. The credit says nothing about whether the sugar is the polarisation it should be, whether the container holds the tonnage on the invoice, or whether the shipment is a fabrication. ICC Academy's wording covers all three: inferior quality, short quantity, and potential fraud. A pre-shipment inspection is the control that addresses the cargo itself, which is why it sits separately from the payment instrument.

Confirmed against unconfirmed, and when confirmation earns its cost

By default a credit is irrevocable. It can be amended or cancelled only with the beneficiary's agreement. What it is not, by default, is confirmed. Confirmation is a second bank's promise added on top of the issuing bank's. UCP 600 defines it, in articles 2 and 8, as "a definite undertaking of the confirming bank, in addition to that of the issuing bank, to honour or negotiate a complying presentation." The confirming bank is usually a bank in the exporter's own country, adding its undertaking on the authorisation of the issuing bank.

A beneficiary wants confirmation because it removes the risk of the issuing bank, and the country risk of its jurisdiction. For a Brazilian exporter selling to a buyer whose bank sits in a market the exporter does not know, a confirmation from a Brazilian or well known international bank turns a distant promise into a local one.

From the buyer's side, the point is the trade off. A confirmed credit is the strongest assurance the seller can get short of being paid in advance, which is why the risk spectrum places it best for the seller. Confirmation adds a fee, charged by the confirming bank, and whether that fee is worth paying turns on how much the exporter distrusts the issuing bank or its country.

Standby letters of credit, a different animal

A standby letter of credit looks like a documentary credit and runs on its own rulebook, ISP98, International Standby Practices, ICC Publication 590. The function is different. A commercial credit is the payment mechanism for a shipment: the exporter presents shipping documents and gets paid. A standby is a secondary payment obligation that only fires if something fails. ICC Academy draws the line: standbys "represent secondary payment obligations triggered by default, not actual shipment."

In a normal shipment the standby is never drawn. It sits behind the deal as a backstop, and the exporter calls on it only if the buyer does not perform. Because the scope and practice differ so much from a commercial credit, ICC gave standbys a separate body of rules rather than folding them into UCP 600. For a buyer, a standby is not how you pay for a cargo. It is a guarantee you post against your own possible default.

Documentary collection: cheaper, and weaker

A documentary collection is a lighter instrument. The exporter ships the goods and hands the documents to a bank with instructions to release them to the buyer against payment or against acceptance. The rules are URC 522, Uniform Rules for Collections, ICC Publication 522, the 1996 revision, with an electronic supplement, eURC Version 1.1, ICC Publication 825E.

There are two settings. Documents against payment (D/P) is sight based: the buyer gets the documents, and the ability to clear the goods, only against immediate payment. Documents against acceptance (D/A) is usance based: the buyer gets the documents against accepting a draft, a promise to pay on a fixed future date, and pays later.

A collection costs less than a credit for the same reason it protects the seller less. In a collection the banks are agents, nothing more. As ICC Academy puts it, banks "act as agents alone and do not assume any liability beyond following the collection instructions." No bank promises to pay. If the buyer walks away while the goods are in transit, the exporter "may need to quickly find another buyer" for a cargo already on the water. D/A adds exposure, because the buyer can take the documents, accept the draft, and still fail to pay on the due date, leaving the exporter "to pursue legal action." A collection moves paperwork under bank instructions. It does not put a bank's balance sheet behind the payment.

The documents behind a credit, and who issues them in Brazil

UCP 600 names only some of the documents a commodity credit calls for. It sets rules for the commercial invoice in article 18, for transport documents including the bill of lading in article 20, and for the insurance document in article 28. Everything else a credit asks for, the packing list, the certificate of origin, the phytosanitary or veterinary certificate, the inspection certificate, falls under article 14(f) as "other documents." UCP 600 does not fix what those must say. The credit itself does. The document list for a commodity shipment is set by the parties in the credit, not prescribed as a standard set by UCP 600, and any source presenting a fixed "commodity document package" as a UCP 600 requirement is overstating what the rules contain.

On the Brazilian side, the certificates a foreign buyer will see come from defined bodies. Phytosanitary certificates for plant products such as coffee, sugar and soybean meal come from MAPA, the Ministry of Agriculture and Livestock, which also issues the veterinary and sanitary certificates for beef and poultry. Certificates of origin come from authorised bodies, with quirks worth checking rather than assuming. Verifying that these documents, and the exporter behind them, are genuine is handled on the getting paid in Brazil page.

A quick authenticity test on the rules themselves

One check costs nothing and screens out a whole class of problems. The real rules have known names and numbers. Documentary credits run on UCP 600, standbys on ISP98, collections on URC 522. ICC has warned specifically that "UCP 700" does not exist, and separately that fraudulent offers circulate quoting non existent "ICC" rules by numbers like 400, 500 or 600 dressed up as current instruments. If a counterparty cites a rulebook you cannot match to the list on this page, that is a reason to stop and verify before any money moves.

Where Incoterms fit, briefly

Incoterms and the payment instrument are different tools that people often blur together. Incoterms allocate cost and risk in the delivery of the goods. The payment instrument decides how and when money changes hands. A credit can be written around any Incoterms rule.

The current set is Incoterms 2020, ICC Publication 723E, in force since 1 January 2020, with eleven rules. Four of them, FAS, FOB, CFR and CIF, are written for sea and inland waterway transport, which covers most Brazilian agricommodity trade. The allocation of costs for each rule sits in its articles A9 and B9, and under CIF the default insurance cover is Institute Cargo Clauses (C). ICC has begun the groundwork for a future Incoterms 2030 revision, noted in its 2026 commission workplan, but no text of that revision exists yet. Which rule to pick, and how it interacts with Brazilian ports, is covered on Incoterms and Brazilian ports.

How to think about choosing an instrument

The choice is a question of where on the risk spectrum both sides can meet. Read down the table, the instruments move exposure from the seller to the buyer. Open account favours the buyer completely and leaves the seller carrying everything. Cash in advance does the reverse. A documentary collection sits in the middle and puts no bank promise behind the payment. A letter of credit adds a bank's promise, and confirmation adds a second bank's promise on top.

None of that settles what any particular deal should use. A first shipment with an unknown counterparty, a repeat relationship built over years, and a one off spot cargo each pull toward a different point on the line. What the instrument does is fixed by the rules. What it should be for a given trade also depends on price, on the cost of confirmation, and on how the goods will be checked. Where an advance payment is on the table, protecting that advance is handled on protecting an advance payment, and the wider set of choices sits under the sourcing from Brazil hub.

This page describes how the instruments and the ICC rules work. It is not financial or legal advice, and it is not a recommendation to use any particular payment method for any particular deal. The rules carry publication numbers and dates so they can be checked against the current ICC texts, which are revised over time.

Sources

• Documentary credit rules in force, UCP 600 (2007 Revision, ICC Publication No. 600, in force 1 July 2007), no later revision, and the ICC warning that "UCP 700" does not exist: ICC Digital Library rules register and ICC news, primary ICC sources.
• Electronic presentation, eUCP Version 2.1 (Publication 823E), and examination practice, ISBP (Publication 821, 2023 edition): primary ICC sources.
• Articles 4, 5, 14(b), 14(c), 16, 18, 20 and 28 of UCP 600: text of the rules, ICC Digital Library, primary ICC source.
• The limit of a letter of credit against inferior quality, short quantity and fraud; the definitions of confirmation and default irrevocability; the risk spectrum from open account to cash in advance; D/P and D/A and why collections are weaker; the standby as a secondary obligation: ICC Academy, training material of the ICC, not the text of the rules.
• Confirmation as a definite undertaking of the confirming bank: UCP 600 articles 2 and 8, primary ICC source, together with ICC Academy.
• Standby rules, ISP98 (ICC Publication 590), and documentary collection rules, URC 522 (1996 revision) with eURC Version 1.1 (Publication 825E): primary ICC sources.
• Incoterms 2020 (ICC Publication 723E, in force 1 January 2020), eleven rules, FAS/FOB/CFR/CIF for sea and inland waterway transport, costs at articles A9/B9, CIF default Institute Cargo Clauses (C), and the 2026 workplan reference to future Incoterms 2030 groundwork: primary ICC sources. The point at which risk transfers under FOB, CFR and CIF was not obtained from the official rules text and is not stated on this page.
• Brazilian issuers of phytosanitary, veterinary and origin certificates (MAPA and authorised bodies): gov.br, primary Brazilian government sources, summarised here and covered in full on the verification page.