Letter of Credit vs T/T: Which Payment Term Should You Use?
Your buyer wants to pay by T/T. Should you accept? The decisive difference between a letter of credit (LC) and a telegraphic transfer is what the bank is obligated to do, and the choice comes down to two variables: deal size and buyer history.
The difference that matters: what the bank is on the hook for
Most comparisons start with fees. That is the wrong starting point. The essential difference between the two is whether a bank carries the obligation to pay you.
T/T (telegraphic transfer)
The bank is a pipe. Your buyer instructs a transfer and it goes out; your buyer does nothing and nothing goes out. The bank carries no responsibility for whether the buyer pays at all. Beyond trusting your counterparty, there is no safeguard in the structure.
Letter of credit (LC)
The bank becomes the paying party. Regardless of what the buyer wants, if you present documents that comply with the LC terms, the issuing bank is obligated to pay. Your buyer's credit risk is swapped for a bank's credit risk.
That single sentence generates every other difference between the two. Why an LC costs more, why document discrepancies matter so much, why T/T settles faster: all of it follows from this.
What "T/T terms" actually means
On its own, "T/T terms" tells you nothing. The timing is the whole deal.
T/T in advance
Paid in full before shipment. Safest for the exporter and hardest for the buyer to accept. It works for new relationships and small sample orders.T/T after shipment
You ship, send a copy B/L, and wait. Favorable to the buyer and, for the exporter, effectively unsecured credit.Split terms (most common in practice)
Something like 30% deposit on order, 70% balance against a copy B/L after shipment. This is what most working relationships settle into.
Practical point: On balance-after-shipment terms, the timing of the original B/L is your only leverage. Release the full set of originals before the balance lands and the buyer can collect the cargo with no remaining reason to pay. Send copies first, release originals only after the balance clears, and write that sequence into the contract.
What "LC terms" actually means
Sight LC
Documents are presented, the bank examines them, and payment follows. Favorable to the exporter.Usance LC
Payment comes 30, 60, or 90 days after presentation, giving the buyer time to sell the goods and raise the cash. The exporter can still get paid early by discounting the accepted draft at a bank.
Who absorbs that discount charge is what separates banker's usance from shipper's usance. Settle it at the contract stage, not after the LC is issued.
Cost: there is a threshold
T/T costs are simple. One remittance fee, typically a flat charge, and it does not scale much with the amount you are moving.
An LC is different. Issuance, advising, negotiation, and wire charges attach at each stage, and a meaningful share of them scale with the credit amount. Then there is the variable that catches exporters out: if your documents are discrepant, a discrepancy fee is added and payment slips by one to two weeks.
The part most exporters miss
An LC is not a safe payment term. It is a payment term that is safe when the documents comply. The moment a discrepancy appears, the bank's obligation falls away and payment depends on the buyer agreeing to waive it. At that point an LC behaves exactly like T/T after shipment.
That is where the threshold comes from. The smaller the deal, the larger a share of your margin the LC fees consume. Insisting on an LC for a small order can cost more in protection than the exposure it removes.
How to choose: two axes
In practice you only need two inputs: deal size and track record with this buyer.
SituationRecommended termNew buyer, large orderSight LCNew buyer, small orderT/T in advance, or 50% depositSome history, large orderLC, or split T/T with a higher depositLong relationship, repeat ordersSplit or after-shipment T/T, with trade credit insuranceHigh country riskConfirmed LC
If political or foreign-exchange risk in the buyer's country is the concern, a confirmed LC adds a second bank (usually in the exporter's country) that undertakes to pay independently. It defends against the issuing bank itself failing. It also costs more.
There is middle ground between the two
These are not the only two options. Documentary collection (D/P and D/A) sits in between: the bank handles the documents and collects on your behalf but guarantees nothing. Cheaper than an LC, safer than open-account T/T. That deserves its own article.
Key takeaways
Under T/T the bank is a pipe. Under an LC the bank is the paying party.
"T/T terms" means nothing until you specify advance, after shipment, or split.
On after-shipment T/T, the original B/L release point is your only leverage.
LC fees scale with value, so they work against you on small orders.
An LC protects you only while the documents comply.
If you chose an LC, make sure the protection actually works
Paying for an LC and then losing two weeks to a discrepancy means you bought the cost without the cover. T flow L/C Checker reviews your document set against the LC terms under UCP 600 and ISBP before presentation, surfacing what the bank would flag while there is still time to fix it.
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