Comparing T/T and L/C payments in the import-export industry is a common question for many people. T/T and L/C are two popular payment methods, yet choosing which method to use for payment can be quite challenging for everyone. Therefore, today's SOH article will provide you with some information about these two payment methods!
What is T/T payment?
Currently, the T/T payment method is abbreviated from the phrase Telegraphic Transfer, known as a widely used form of payment due to its convenience in international trade transactions. The T/T payment method is very suitable for small-value orders, where both parties trust each other, have a long-standing cooperative relationship, sometimes between parent and subsidiary companies.
The T/T payment method is divided into two types: payment in advance and payment after delivery
- For the T/T payment method in advance (TTR - Telegraphic Transfer Remittance), the buyer (importer) must transfer money (entirely or partially) to the seller before the goods are shipped.
- For the T/T payment method after shipment (TT after shipment): The buyer (importer) receives the goods before making payment to the seller (exporter). However, one point to note about this payment method is that it relies on trust and long-term cooperation for the transaction to proceed.
What is L/C payment?
LC payment is abbreviated from the phrase Letter of Credit, which is a form of payment through a letter of credit, meaning the buyer (importer) needs to deposit funds at the bank with the seller for the bank to ensure the payment process (basically understood as a deposit for payment). With the LC payment method, the bank will commit on behalf of the importer to the exporter or supplier to make payments according to the pre-defined terms. After the seller has delivered the goods as agreed and in full accordance with the LC terms, the buyer's bank will make the remaining payments in the purchase contract.
So what are the differences between TT and LC, and what are the advantages and disadvantages of these two methods? Let's continue reading the most important content with SOH!
Comparing T/T and L/C payments
Advantages of T/T payment
- The process is not overly complicated, and any arising transactions are easily handled with quicker resolution times compared to the L/C method.
- The cost of T/T payment through banks may be more cost-effective.
- There is no need to tie up capital as collateral as in the case of an L/C.
- Documentation requirements are not as meticulous as with an L/C.
- Making the payment in advance also provides more convenience for the seller throughout the transaction process (avoiding certain risks of loss).
Disadvantages of T/T payment
- There are significant risks involved as it depends on the buyer's ability to pay for the goods.
- It poses risks because sometimes the seller may not have sufficient funds to make the payment.
- The payment after delivery method disadvantages the seller because the goods have already been shipped, the buyer may have received them, and the process of transferring funds back may be delayed.
- Risks arise when the buyer does not accept the goods, causing the seller to incur transportation costs.
- Capital recovery is much slower.
Advantages of L/C payment
- The bank is responsible for making payments according to the terms specified in the letter of credit under any circumstances.
- Any delays in the transfer of documents are also minimized to the fullest extent.
- When the documents are submitted to the issuing bank, payment will be made promptly.
- Customers may also negotiate discounts with the LC.
- The seller can be more assured that the buyer will make full payment for the goods, avoiding unfair loss of funds.
- The bank also benefits from a profit or commission in this process.
Disadvantages of L/C payment
- The seller may have less understanding of this payment method.
- Presenting documents may be delayed compared to the time of issuance of the letter of credit, at which point the bank may also refuse to make payment to the seller.
- For the buyer, the issued letter of credit is independent of the underlying contract, and the bank is not responsible for rechecking the documents of the seller.
- Sometimes, there are high risks for both parties.
SOH has just provided you with some information regarding the comparison between T/T and L/C payments. Stay tuned to SOH's articles and website for more useful information!