Letter of Credit vs T/T Wire — Which Payment Term to Use

When a Chinese factory sends you a proforma invoice, the payment line usually reads something like "30% T/T deposit, 70% before shipment." Whether you should accept that, push for different T/T timing, or move the whole transaction onto a letter of credit depends mostly on order size and how well you know the counterparty. This guide covers how each instrument actually works and where the practical cutoff sits.

(For how to negotiate the split and timing once you've chosen an instrument, see our companion guide on negotiating payment terms with Chinese factories.)

T/T wire transfer: the default

A T/T (telegraphic transfer) is a plain international bank wire, almost always in USD through SWIFT. It is how the large majority of auto-parts orders under six figures get paid.

Mechanics. You wire a deposit (typically 30%) against the proforma invoice; the factory schedules production. The balance is wired either before shipment (supplier-favorable), against a copy of the bill of lading (the most common professional middle ground), or some days after B/L date (buyer-favorable, usually only after an established history).

Costs. Sending fees of roughly $25–50 per wire plus intermediary-bank deductions. On a $40,000 order, total wire costs are a rounding error — this is T/T's great advantage.

Speed. Funds typically land in 1–3 business days. No documents to negotiate, no bank scrutiny of paperwork.

What T/T does not give you. Protection. Once the money leaves, your security is the supplier's desire to keep your business, whatever pre-shipment inspection you arranged, and the balance-timing leverage you negotiated. T/T is a trust instrument, which is exactly why the deposit/balance split matters so much.

Letter of credit: bank-mediated trust

A letter of credit replaces "trust the counterparty" with "trust the documents." Your bank commits to pay the supplier's bank when — and only when — the supplier presents documents that exactly match the L/C terms: bill of lading, commercial invoice, packing list, often an inspection certificate.

What it protects. The factory cannot get paid without shipping documents proving the goods went on the vessel as specified. You cannot refuse payment on a whim if the documents comply. Both sides trade flexibility for certainty — that symmetry is why factories accept L/Cs from strangers on large orders.

What it costs. Issuance, advising, and negotiation fees typically total 0.5–1.5% of the transaction, with minimums that punish small orders. Your bank will also require a credit line or cash collateral. Add the internal cost of getting documents exactly right: a significant share of first-time L/C presentations contain discrepancies, and every discrepancy means delay and fees.

Sight vs usance. A sight L/C pays on compliant presentation. A usance L/C (e.g., 60 or 90 days after B/L date) adds supplier financing — useful for cash flow, but factories price the waiting time into your quote.

The catch. An L/C verifies documents, not quality. A factory can ship compliant paperwork and mediocre parts. Pair any L/C with a pre-shipment inspection requirement written into the L/C documents (e.g., an SGS/BV certificate as a required presentation document) — that is what gives the inspection teeth.

Where the practical cutoff sits

• Under ~$20,000: T/T, full stop. L/C fees and friction are disproportionate. Manage risk through the deposit split, supplier verification, and inspection.
• $20,000–$100,000: T/T remains the norm. Move the balance trigger to "against B/L copy," add a third-party pre-shipment inspection, and consider splitting the first order across two smaller POs.
• Above ~$100,000, new counterparty: an L/C earns its fees. Most established exporters handle L/Cs routinely at this size, and a factory that refuses an L/C on a six-figure first order is telling you something.
• Above ~$100,000, proven relationship: many buyers revert to T/T with extended balance terms — cheaper and faster than an L/C once trust exists.

The escrow middle ground

Between raw T/T and a full L/C sit escrow-style mechanisms: platform trade-assurance programs and third-party escrow services hold your payment and release it against agreed shipment or inspection milestones. They are simpler than an L/C and give meaningful protection on small-to-mid orders, with two caveats: dispute resolution favors documented, objective criteria (specs, inspection standards — write them down), and coverage ends where the platform's visibility ends. They are a useful tool for first orders in the $5,000–$50,000 band where an L/C would be overkill.

Fraud checks that apply to every instrument

• Changed bank details mid-transaction are fraud until proven otherwise. Email accounts get compromised precisely to send "our bank account has changed" messages. Verify by phone on a number you already had — not one in the email.
• Company account only. The beneficiary name should match the company on your contract. A request to wire to a personal account or an unrelated trading company is a stop sign.
• First wire small. On a new relationship, structure something — sample order, tooling deposit — so your first transfer is small and verifies the banking channel end to end.

Decision summary

| Situation | Instrument | |---|---| | Samples, trial orders | T/T (often 100% upfront — keep them small) | | First production order, $5k–$50k | T/T 30/70 against B/L copy, + inspection; escrow if available | | First order, $100k+ | Sight L/C with inspection certificate as a required document | | Repeat orders, established supplier | T/T with progressively buyer-favorable balance timing | | Cash-flow constrained, large order | Usance L/C — priced into the quote, but predictable |

The instrument sets the ceiling on your protection; the details — split, trigger, inspection — determine how much of that ceiling you actually get. Choose the instrument by order size, then negotiate the details deliberately.