LC vs. TT: Choosing Payment Terms for Cross-Border Sourcing Deals

When you're sourcing internationally for the first time, the payment terms conversation can feel more intimidating than the product itself. Two terms come up constantly: LC (Letter of Credit) and TT (Telegraphic Transfer). Neither is universally "safer" — they protect different parties in different ways, and the right choice depends on your deal size, your relationship with the supplier, and how much risk you're willing to carry.

What a Letter of Credit actually does

An LC is a guarantee issued by your bank, promising the supplier payment once they meet the exact conditions specified in the credit — usually proof that goods were shipped, in the right quantity, by the agreed date. The bank checks documents, not goods, so an LC protects against non-payment and non-shipment, but it doesn't guarantee product quality.

LCs suit larger orders, new supplier relationships, or deals where neither side wants to extend the other unsecured credit. The tradeoff is cost and paperwork — banks charge fees for issuing and confirming LCs, and any documentation mismatch can delay payment.

What Telegraphic Transfer actually does

TT is a direct bank-to-bank wire transfer. It's fast and cheap compared to an LC, but it carries more risk depending on timing. The industry-standard structure is a split payment: a deposit (commonly 30%) before production starts, and the balance before or against shipping documents. This spreads risk between buyer and supplier rather than eliminating it for either side.

TT works well once trust is established — repeat suppliers, smaller order values, or deals where the cost and delay of an LC don't make sense.

How to decide

• Is this a new supplier relationship, or a repeat one? New relationships lean toward LC or a heavily front-loaded deposit structure; repeat relationships can move toward TT.
• What's the order value relative to what you can afford to lose? Higher stakes justify the extra cost and process of an LC.
• How fast do you need the deal to move? TT settles in days; LC issuance and document review can take weeks.

Most experienced buyers don't lock into one method — they negotiate deal by deal. A sourcing partner who can structure either, or a deposit-plus-balance hybrid, gives you room to match the payment term to the actual risk in front of you, instead of forcing every deal through the same process.

Where escrow and hybrid structures fit in

Neither LC nor TT is the only option. A deposit-plus-balance structure — commonly 30% upfront, 70% against shipping documents or before final dispatch — splits the risk between buyer and supplier without the cost and paperwork of a full LC. This is often the practical middle ground for buyers who don't yet have the relationship history for open TT terms but find an LC too slow or too expensive for the order size.

Third-party escrow services are another option worth understanding, particularly for first orders with a new supplier. Funds are held by a neutral party and released once agreed conditions are met — inspection reports, shipping documents, or delivery confirmation, depending on how the deal is structured. It adds a layer of protection similar to an LC without requiring a bank-issued instrument, though not every supplier will accept it as readily as they would a straightforward TT.