Letter of Credit vs Telegraphic Transfer: Which Payment Method is Safer?

Choosing the right payment method in international trade can make or break your business. The two most common methods are Letter of Credit (L/C) and Telegraphic Transfer (T/T). Let's break down the differences, advantages, and best use cases for each.

What is a Letter of Credit (L/C)?

A Letter of Credit is a bank-guaranteed payment method where the buyer's bank promises to pay the seller upon presentation of specific documents.

How L/C Works:

1. Buyer and seller agree on L/C terms
2. Buyer applies for L/C at their bank (issuing bank)
3. Issuing bank sends L/C to seller's bank (advising bank)
4. Seller ships goods and submits documents
5. Bank verifies documents
6. Seller gets paid
7. Bank debits buyer's account

Types of L/C:

Irrevocable L/C

• Cannot be changed without all parties' consent
• Most common and secure type

Confirmed L/C

• Seller's bank guarantees payment
• Extra security for seller

Revolving L/C

• For regular shipments
• Automatically renews

Transferable L/C

• Can be transferred to third parties
• Useful for intermediaries

What is a Telegraphic Transfer (T/T)?

A Telegraphic Transfer (also called Wire Transfer) is a direct electronic bank-to-bank transfer of funds.

How T/T Works:

1. Buyer and seller agree on payment terms
2. Buyer initiates wire transfer at their bank
3. Funds transferred electronically
4. Seller's bank receives funds
5. Seller gets paid

Common T/T Arrangements:

100% T/T in Advance

• Full payment before shipment
• Highest risk for buyer

Partial Deposit

• 30% deposit, 70% before shipment
• Shared risk

T/T After Delivery

• Payment after goods received
• Highest risk for seller

Detailed Comparison

Security

L/C: High Security

• ✅ Bank guarantee
• ✅ Payment conditional on documents
• ✅ Reduces both parties' risk
• ❌ Requires strict document compliance

T/T: Medium to Low Security

• ✅ Fast and direct
• ❌ No bank guarantee
• ❌ Relies on trust
• ❌ Risk of non-payment

Cost

L/C: Higher Cost

• Opening fee: 0.5-1.5% of transaction value
• Amendment fees: $50-$100 each
• Confirmation fees: Additional %
• Negotiation fees: Variable
• Total Cost: Often 2-3% of transaction value

T/T: Lower Cost

• Wire transfer fee: $15-$50 per transaction
• Currency conversion fees: Minimal
• No intermediary bank fees typically
• Total Cost: Usually under $100

Processing Time

L/C: Slower

• Application: 2-5 business days
• Issuance: 1-3 business days
• Document review: 5-7 business days
• Total Time: 10-20 business days

T/T: Faster

• Initiation: Same day
• Transfer: 1-3 business days
• Receipt: Same day after arrival
• Total Time: 1-3 business days

Documentation Requirements

L/C: Strict Documentation Required documents often include:

• Commercial Invoice
• Packing List
• Bill of Lading
• Certificate of Origin
• Insurance Certificate
• Inspection Certificate

T/T: Minimal Documentation

• Invoice for reference
• Payment confirmation
• No strict requirements

When to Use L/C

✅ Use L/C When:

1. First-time transactions

   • No established trust
   • Unknown counterparty

2. High-value orders

   • Large transactions ($50,000+)
   • Significant financial risk

3. Political/economic instability

   • Uncertain buyer's country situation
   • Currency restrictions

4. Buyer requires it

   • Some buyers prefer L/C
   • Government contracts often require it

5. You need financing

   • L/C can be used for trade financing
   • Banks may offer better rates

❌ Avoid L/C When:

• Small transactions (under $10,000)
• Established, trusted relationships
• Time-sensitive shipments
• Cost is a major concern

When to Use T/T

✅ Use T/T When:

1. Established relationships

   • Long-term partners
   • Proven track record

2. Small to medium orders

   • Lower value transactions
   • Cost-effectiveness important

3. Speed is crucial

   • Urgent shipments
   • Quick turnaround needed

4. Lower risk tolerance acceptable

   • Domestic-like trust level
   • Reputation at stake

❌ Avoid T/T When:

• First-time buyers
• High-risk countries
• Large transactions with unknown parties
• No recourse if non-payment occurs

Hybrid Payment Solutions

Option 1: Partial L/C

• 30% T/T deposit
• 70% L/C against documents
• Balances cost and security

Option 2: Standby L/C

• T/T payment
• L/C as backup guarantee
• Lower fees than regular L/C

Option 3: Documentary Collection

• Bank collects documents
• Buyer pays to receive documents
• Middle ground between L/C and T/T

Risk Mitigation Strategies

For Sellers Using T/T:

1. Request advance payment (at least 30-50%)
2. Use trade insurance (EXIM or private)
3. Conduct credit checks on buyers
4. Start with smaller orders to build trust
5. Use escrow services for new relationships

For Buyers Using L/C:

1. Review L/C terms carefully before accepting
2. Ensure documents are obtainable
3. Specify clear inspection rights
4. Include amendment provisions
5. Work with experienced banks

Real-World Scenarios

Scenario 1: New Buyer, $100,000 Order

Recommendation: L/C

• Unknown relationship
• High value
• Security worth the cost

Scenario 2: Regular Client, $15,000 Order

Recommendation: 30% T/T Deposit + 70% T/T Before Shipment

• Established trust
• Moderate value
• Cost-effective

Scenario 3: Government Contract, $500,000

Recommendation: Irrevocable Confirmed L/C

• Large value
• Government requirement
• Maximum security

Scenario 4: Sample Order, $2,000

Recommendation: 100% T/T in Advance

• Small value
• L/C cost prohibitive
• Simple process

Common Mistakes to Avoid

L/C Mistakes:

❌ Not reading L/C terms carefully

• Every requirement must be met exactly

❌ Late document submission

• Strict deadlines must be observed

❌ Document discrepancies

• Even minor errors can cause rejection

❌ Assuming all L/Cs are the same

• Terms vary significantly

T/T Mistakes:

❌ Shipping before receiving payment

• Unless buyer is fully trusted

❌ No written agreement

• Always confirm payment terms in writing

❌ Ignoring wire transfer fraud risks

• Verify bank details independently

❌ Not tracking payments

• Keep detailed records

Conclusion

Both L/C and T/T have their place in international trade:

Choose L/C for:

• Security and guaranteed payment
• New relationships
• High-value transactions
• Risky markets

Choose T/T for:

• Speed and efficiency
• Established relationships
• Lower transaction costs
• Smaller orders

The best payment method depends on your specific situation, relationship with the counterparty, and risk tolerance.

When creating your commercial invoice, always specify the payment terms clearly. Our invoice generator includes dedicated fields for Terms of Payment, making it easy to document your agreed payment method!