TT vs Letter of Credit: Which Is Safer for Wholesale Orders?
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TT vs letter of credit is really a question of who carries the risk. A telegraphic transfer (T/T) simply moves money, so it is quick and inexpensive, but whoever pays or ships first is exposed. A letter of credit (L/C) puts a bank’s payment promise between buyer and seller, which protects both, at the cost of higher fees and strict document rules.
For international cosmetics wholesale, many buyers start with one method and move to another as trust builds. The table below compares the two, followed by guidance on when each fits.
How a T/T payment works
A telegraphic transfer, also called a wire transfer, is an instruction from the buyer to its bank to send funds to the supplier’s account, normally over the SWIFT network. The banks transfer money; they do not check the goods, the contract or any shipping documents.
When the wire is sent decides who carries the risk:
- Payment in advance: the supplier is paid before shipping. The U.S. International Trade Administration’s methods of payment guide notes that this removes the exporter’s credit risk but is the least attractive option for the buyer.
- Payment after shipment (open account): goods leave first and money follows on an agreed date, which the same guide calls one of the highest-risk options for an exporter.
- Split payment: a deposit on order and the balance before or after shipment, a common middle ground.
How a letter of credit works
A letter of credit is issued by the buyer’s bank (issuing bank) at the buyer’s request (applicant). It promises the supplier (beneficiary) payment if the supplier presents documents that match the credit’s terms. An advising bank in the supplier’s country passes the credit on; if the supplier wants extra security, another bank can add its own confirmation.
Most credits are issued subject to the ICC’s Uniform Customs and Practice for Documentary Credits, UCP 600, which the ICC Banking Commission approved in October 2006 and which took effect on 1 July 2007.
Banks deal in documents, not goods: they examine the commercial invoice, bill of lading or air waybill, packing list, certificate of origin and anything else the credit lists.
A misspelling or a quantity that does not match can be treated as a discrepancy and delay or block payment. The ITA’s letter of credit page describes the required documents as detailed and prone to errors, and recommends having them prepared by trained professionals.
TT vs letter of credit comparison table
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| Item | T/T (telegraphic transfer) | L/C (letter of credit) |
|---|---|---|
| Role of the bank | Moves funds only, no payment guarantee | Issuing bank promises payment against complying documents |
| Speed | Starts as soon as the buyer instructs the bank | Issuing, advising and document examination add steps |
| Cost structure | Sending fee plus any intermediary bank charges | Issuing, advising, confirmation and negotiation fees, among others |
| Supplier’s risk | Low if paid in advance, high if paid after shipment | Low; depends on the issuing bank, lower still if confirmed |
| Buyer’s risk | High if paying in advance, low if paying later | Low; payment requires shipping documents |
| Paperwork | Contract and invoice | Full document set that must match the credit exactly |
| Governing rules | The sales contract | Usually ICC UCP 600 |
| Typical fit | Repeat trade with trusted partners, low-value orders | First orders, large orders, little credit information on the other side |
The ITA guide calls letters of credit one of the most secure payment instruments available and says they are particularly useful when reliable credit information on the buyer is hard to obtain. The other side of that is cost: on a low-value order, L/C fees and document work can be out of proportion to the order value.
The middle option: documentary collection
Between T/T and L/C sit documentary collections. The supplier’s bank sends the shipping documents to the buyer’s bank, which releases them only when the buyer pays (documents against payment, D/P) or accepts a bill of exchange (documents against acceptance, D/A).
It is cheaper than a credit, but no bank guarantees payment, so the ITA guide rates the exporter’s risk as higher than with an L/C.
Choosing a payment method
- First order, significant value: consider an L/C, confirmed if you or the supplier have doubts about the issuing bank.
- Samples or a low-value first order: T/T in advance is usually the practical choice; credit fees would outweigh the order.
- Established relationship: split or deferred T/T is common. If you sell on deferred terms, look at export credit insurance or similar risk tools.
Match the payment method to the Incoterms® rule so that the documents line up. A credit that asks for an ocean bill of lading on goods sold under a rule meant for air cargo is a discrepancy waiting to happen; see FOB vs EXW vs DDP for how the rules split responsibilities.
Finally, payment fraud is common in trade: if you receive an email saying a supplier’s bank details have changed, confirm by phone or another known channel before sending money.
Related reading: How to export cosmetics from Korea · FOB vs EXW vs DDP
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