Export & Import · Payment Terms
TT vs LC: Comparing Payment Terms
Payment terms are a separate decision from the Incoterm, and often the most negotiated part of a first-time export order. This guide compares TT and LC at a practical level.
Telegraphic Transfer (TT)
TT is a direct bank-to-bank wire transfer. It is simple and fast to execute, but as a payment method it relies entirely on trust between the parties — there is no bank guarantee of payment or performance built into the mechanism itself.
TT is commonly structured as an advance payment (in full or part) before production or shipment, with the balance paid before or against shipping documents, depending on the relationship and risk appetite of both sides.
Letter of Credit (LC)
An LC is a payment undertaking issued by the buyer's bank, promising to pay the seller provided the seller presents documents that comply exactly with the LC's terms. It shifts payment risk from reliance on the buyer's goodwill to reliance on a bank's undertaking, subject to strict document compliance.
LCs involve more documentation, cost (bank charges) and process discipline than TT, and are typically used for larger orders, new buyer relationships, or where the exporter's bank requires it for financing purposes.
Choosing between them
For established relationships with a payment track record, TT (often partly in advance) is commonly used for its simplicity. For first-time, higher-value, or higher-risk transactions, an LC provides more structured protection, provided the exporter can meet the strict documentary compliance it requires.
The choice should reflect the buyer's risk profile (see the Buyer KYC Protocol) and the transaction's size and complexity, not a fixed rule for every order.
Key Takeaways
- TT relies on trust between the parties; an LC substitutes a bank's payment undertaking, subject to exact document compliance.
- LCs cost more and require more process discipline, but reduce payment risk on larger or first-time transactions.
- The right choice depends on buyer risk profile and transaction size — not every order needs the same payment structure.
FAQ
Is LC always safer than TT for an exporter?
An LC shifts payment risk to a bank undertaking, but only pays out if documents comply exactly with the LC terms — a poorly worded or unworkable LC can itself create payment risk. See the LC Document Verification Protocol for how discrepancies are typically handled.
What percentage advance is normal under TT?
There is no fixed industry-standard percentage — advance proportions are negotiated between buyer and seller based on relationship, order size and risk. Confirm the specific terms in writing before production begins.
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