Letter of credit: how to get paid by a foreign customer you do not know

2 November 2026, 08:13

Anyone who ships to an unknown foreign customer risks finding out that they will not be paid when the goods have already crossed the border. According to Istat, Italy's national statistics institute, in September Italian sales to countries outside the European Union grew by 5.4% on a year earlier: those to the United States fell by 6.6%, those to Turkey rose by more than 20% and those to China by more than 30%. Whoever moves sales towards new markets meets buyers whose punctuality they do not know, banks they know nothing about and distant courts, and before accepting an order has to ask who will answer for payment.

With payment in advance or an invoice on terms, the risk sits entirely on one side

The simplest solutions leave only one of the parties exposed to ending up without the money or without the goods. With payment in advance the seller is safe, while the buyer risks paying for goods that will not arrive, and a new customer often refuses to do so. With an invoice payable at sixty or ninety days the opposite happens: if the buyer does not pay, recovering the money often leaves only a lawsuit in another country, with laws and timescales the business does not know, for an amount that sometimes does not justify the cost.

In between sits the documentary credit, also called a letter of credit. The buyer asks its own bank, which for this reason is called the issuing bank, to undertake to pay the seller an agreed sum if, by a certain date, it is presented with the documents listed in the credit: the invoice, the transport document, often the certificate of origin and the insurance policy. The rules are the Uniform Customs and Practice of the International Chamber of Commerce, in the version known as UCP 600, which documentary credits normally refer to in their text.

The bank pays against documents, not against goods

Article 4 of UCP 600 states that the bank's undertaking is separate from the sales contract, even if the credit refers to it: the bank does not enter into disputes between seller and buyer. Article 5 adds that banks deal with documents, not goods. The seller is therefore paid if it presents documents that comply with what is written in the credit, even if in the meantime the buyer has changed its mind; the buyer knows that payment will come only against written proof that the shipment left as agreed. Quality remains outside that check, and anyone who wants it verified asks for the certificate of an independent inspector among the documents.

The undertaking of a foreign bank, however, is worth as much as its soundness and as much as the country in which it operates, which in a currency crisis can block payments abroad. That is why the seller can ask for the credit to be confirmed by an Italian bank, usually the one that notifies it of the credit and that it often already works with: with confirmation, governed by article 8 of the same rules, the Italian bank too undertakes to pay against complying documents, and the risk moves from the distant institution to one the business knows. Confirmation carries a commission that grows with the amount, with the duration and with the country risk, and the sales contract must say who bears it.

The risk that remains lies in the documents

The weak point of the documentary credit comes from the same rule in article 5 that makes it safe. If a document does not match the text of the credit, for example a shipment date later than the one allowed or a description different from the one written, the bank can refuse it, notifying the discrepancies found as article 16 requires. At that point payment depends on the buyer, who may or may not accept the non-complying documents, and the seller is back in the position it wanted to get out of, with the goods already on their way.

That is why the text of the credit is read as soon as it arrives, before production starts. Every condition is checked to make sure it can really be met: the date by which to ship, compatible with the production department's lead times; the documents required, which the business or its freight forwarder must be able to obtain; the descriptions, which must match those on the invoice. For any condition that cannot be met, an amendment is requested from the buyer straight away, while it still has an interest in granting it. When planning export sales to a new market, the payment method is decided together with the price, because an order with a good margin and no guarantee of collection can cost the entire value of the goods shipped.

Faced with the first order from a new country, then, the seller needs to know on whom collection will depend: the buyer alone, the bank that issued the credit, or an Italian bank that has committed itself to pay.

This article was prompted by a news item published in ANSA on 29 October 2026.