Incoterms and Letter of Credit: Why Mismatches Block Payment

Your sales contract says FCA Busan. The letter of credit says FOB Busan. You follow the contract and write FCA on your commercial invoice. The bank rejects your documents.

This guide explains why Incoterm mismatches between your L/C and your invoice cause payment rejections, and how to prevent them before you ship.

Why does a one-word Incoterm difference get your L/C documents rejected?

Because banks follow a principle called strict compliance. Under UCP 600 — the international rules governing letters of credit, published by the International Chamber of Commerce (ICC) — the bank's only job is to check whether your documents match the L/C terms. Word for word.

The bank does not read your sales contract. It does not interpret what you meant. According to UCP 600 Article 4, the credit is a separate transaction from the underlying contract. Even if your contract says FCA, the bank only sees the L/C — and if the L/C says FOB, your invoice must say FOB.

This is where exporters get caught. They know FCA is the correct Incoterm for container shipments. The ICC itself recommends FCA over FOB for containers. So they "correct" it on the invoice. The bank sees the mismatch and raises a discrepancy.

According to the law firm Holman Fenwick Willan (HFW), one of the top 10 common L/C discrepancies is: "The invoice does not specify the shipment terms (CIF, FOB, etc.) as stated in the LC." Whether the term is missing, different, or incomplete — the result is the same. The bank refuses to pay.

How often do L/C documents get rejected?

More often than most exporters expect. According to the ICC Banking Commission's Technical Advisory Briefing No. 3 (2022), an estimated 65-80% of documents submitted under documentary credits are refused on first presentation.

That does not mean 65-80% of exporters never get paid. Most discrepancies are eventually resolved through amendments, waivers, or resubmission. But every rejection means delays — typically days, sometimes weeks. And during that time, your cash flow is frozen.

A separate study cited by trade finance professionals found that the average discrepancy rate on first-time presentations under export L/Cs was 56%, according to the LC Market Intelligence Survey conducted by DC-Pro. The ICC Banking Commission's own estimate of 65-80% suggests the problem may have worsened, not improved.

Incoterm-related discrepancies are one of the most preventable causes. Unlike missing documents or late shipments, an Incoterm mismatch is something you can catch the moment you receive the L/C.

What exactly does the bank check when it reviews Incoterms on your invoice?

The bank checks whether the complete trade term description on your invoice matches the L/C. This includes the Incoterm rule, the named place, and the version reference.

According to the ISBP (International Standard Banking Practice), published by the ICC as a companion guide to UCP 600: when the L/C describes the goods and incorporates the trade term and the source of the trade term — such as "CIF Hong Kong Incoterms 2020" — this entire description must appear on the invoice.

Here is what that means in practice:

L/C says "FOB Busan Incoterms 2020" → Invoice must say "FOB Busan Incoterms 2020" — not just "FOB Busan"
L/C says "CIF Rotterdam" → Invoice must say "CIF Rotterdam" — adding "Incoterms 2020" when the L/C doesn't mention it could create a conflict
L/C says "FOB Busan" but your contract says "FCA Busan" → Invoice must say "FOB Busan" — follow the L/C, not the contract

The principle is straightforward: copy what the L/C says. Do not add, remove, or change any part of the trade term description.

What if the L/C uses the wrong Incoterm?

This happens more often than you might think. The buyer's bank issues an L/C with "FOB Singapore Changi Airport" — but FOB is a maritime term. For air freight, FCA would be correct. Or the L/C says "CIF Tokyo Airport" when CIP is the proper term for non-ocean shipments.

According to the ICC Banking Commission, the exporter must still fulfill the conditions stated in the L/C — even if the Incoterm is technically wrong. If the L/C says "FOB Singapore Changi Airport Incoterms 2010," your invoice must say exactly that. Writing "FCA Singapore Changi Airport Incoterms 2010" — even though FCA is the correct term — will result in a discrepancy and the bank will refuse your documents.

The correct approach is to request an amendment before shipping. When you receive the L/C and spot an incorrect or mismatched Incoterm:

Contact your buyer immediately
Ask the buyer to instruct the issuing bank to amend the L/C
Wait for the amended L/C before preparing your documents
Only then ship and present documents that match the corrected terms

Do not assume the bank will overlook the difference. Under strict compliance, they will not.

Which Incoterms work best with letters of credit?

The "C" rules — CIF, CFR, CIP, and CPT — work best with letters of credit. According to Incoterms experts, this is because delivery under a C rule aligns with the moment the seller presents transport documents to the bank.

Under CIF or CFR, the seller arranges shipping and presents a bill of lading to the bank. The bill of lading serves as proof that goods were dispatched. The bank pays against these documents. The timing works because the seller controls the documentation chain from shipment to presentation.

With FOB, FCA, and FAS (the "F" rules), the system still works, but the buyer arranges main carriage. This means the transport document may be issued to the buyer's freight forwarder, creating potential complications in document flow.

The "D" rules — DDP, DAP, and DPU — present the most challenges. Under these terms, delivery happens when goods arrive at the destination. But a bill of lading only proves dispatch, not arrival. The seller can present a compliant B/L, get paid, and the goods may never arrive. Alternatively, if the L/C requires proof of delivery at destination, the buyer could refuse to sign a receipt — leaving the seller unable to present compliant documents.

If you are selling under a D rule and the buyer insists on an L/C, discuss the document requirements carefully. Make sure the L/C calls for documents that you — not the buyer — can produce and control.

Quick reference: L/C and Incoterms checklist

Compare the Incoterm in the L/C against your sales contract immediately upon receipt
Check that the named place (port, airport, address) matches exactly
Verify the version reference — "Incoterms 2020" must appear if the L/C includes it
If anything differs from your contract, request an amendment before shipping
Copy the trade term description from the L/C onto your invoice word for word
Do not "correct" a wrong Incoterm on your own — amend the L/C instead
For CIF/CIP terms, confirm insurance documents match L/C requirements (minimum 110% of invoice value per UCP 600)
Present all documents within the L/C's stipulated timeframe (default: 21 days after shipment under UCP 600)