A new buyer insisted on a Letter of Credit for a modest trial order last year. Order value: under $15,000. Reasoning: LC is “the safe option,” full stop. It wasn’t wrong to want protection. But an LC on a $15,000 trial run added roughly three extra weeks of bank processing and a few hundred dollars in fees, for a transaction size where a straightforward TT with a 50% deposit split would have gotten the same practical protection — faster, cheaper. Payment terms aren’t one “safe vs. risky” spectrum. They’re a tool that fits some deal sizes and relationships better than others, and picking the wrong one costs real time and money on both sides — one more piece of the process covered in our buyer’s guide to sourcing electrical steel from China.
Core Key Points
- TT (Telegraphic Transfer), also called a wire transfer, is a direct bank-to-bank payment that typically clears in 2-5 business days — fast, low bank cost, no guarantee standing behind either party.
- LC (Letter of Credit) is a bank’s commitment, on the buyer’s behalf, to pay once contractually specified terms and documentation are met. Real protection. Also real cost — commonly 1-2 weeks longer to arrange than a straightforward TT, plus bank fees on both ends.
- Neither method is universally “safer.” Applying LC to every order regardless of size adds cost and delay that a $15,000 trial run, for instance, doesn’t need.
- A common structure for established relationships: 30-50% deposit before production, balance before or against shipping documents. Middle ground — no full LC process, still protects both sides’ cash flow exposure.
- Below a certain order size, plenty of suppliers only accept TT. Bank fees and processing overhead on an LC don’t scale down with a small transaction — the math stops making sense.
TT: How It Works
A TT is, functionally, a wire transfer. Money moves bank to bank, clearing in 2-5 business days most of the time. No bank guarantee on either side — it’s a direct payment resting on trust and agreed terms between buyer and seller.
The typical structure on a new or moderate-size relationship: a deposit, commonly 30-50%, before production starts, with the balance due before shipment or against copies of shipping documents. Gives the supplier working capital to start. Gives the buyer some leverage too — the balance doesn’t move until the goods are ready or already in transit.
LC: How It Works
A Letter of Credit is a commitment by the buyer’s bank that payment will go to the seller, provided the seller meets specific terms and presents the required documentation exactly as the LC specifies. It’s a trade finance tool built to protect both exporters and importers — the seller gets a bank’s promise, not just the buyer’s, and the buyer gets assurance that payment only releases once documentation proves the shipment happened as agreed.
The tradeoff is process, and it’s a real one. Bank fees on both sides. Precise document preparation, where a mismatch between LC terms and actual shipping documents can delay or block payment release entirely. Generally 1-2 weeks longer to arrange than a wire transfer, sometimes more depending on the issuing bank.
When TT Makes More Sense
- Established relationships with a track record — repeat orders, consistent delivery on both sides
- Smaller orders, where LC bank fees eat a disproportionate share of the transaction value
- Trial orders, where a modest deposit-and-balance TT split protects both sides without the overhead of a full LC
- Time-sensitive orders, where LC processing time would push back production start meaningfully
When LC Actually Earns Its Cost
- First-time relationships with a new supplier, no track record to fall back on
- Large orders, where transaction size justifies the fees and processing time for the added protection
- Internal procurement or financing requirements on the buyer’s side that specifically call for bank-level assurance
- Complex shipments — multiple certifications, specific Incoterms, staged deliveries — where the document-driven structure of an LC actually earns its keep
FAQ
Is TT or LC safer for paying a Chinese electrical steel supplier?
Neither is universally safer. It depends on deal size and relationship history. LC adds real bank-level protection valuable for large or first-time orders. TT with a deposit-and-balance split gives reasonable protection for established relationships or smaller orders, at a fraction of the cost and time.
How long does each payment method typically take to clear?
A TT typically clears in 2-5 business days. An LC takes considerably longer, commonly 1-2 weeks more, due to bank processing and documentation requirements on both sides.
Why would a supplier refuse to accept a Letter of Credit for a small order?
LC bank fees and processing overhead don’t scale down proportionally with transaction size. Below a certain order value, the cost and delay stop making sense relative to what’s being protected, so many suppliers only accept TT.
What’s a reasonable deposit split for a TT-based order?
A common structure is 30-50% deposit before production starts, with the balance due before shipment or against copies of shipping documents. The exact split depends on order size, relationship history, and the supplier’s working capital needs.
Tell us the order size and whether this is a first-time or repeat relationship, and we’ll tell you honestly whether an LC is worth the overhead here or whether a straightforward TT split gets you the same practical protection, faster.
