Comparing Payment Methods: L/C, T/T, and Escrow Services

When sourcing products from China, selecting the right payment method is critical for balancing security, cost-effectiveness, and operational efficiency. Three common options – Letter of Credit (L/C), Telegraphic Transfer (T/T), and Escrow Services – each cater to different business needs. Below, we analyze their mechanisms, advantages, drawbacks, and ideal use cases to help small-to-medium overseas buyers make informed decisions.

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1. Letter of Credit (L/C)

A bank-mediated payment method where the buyer’s bank guarantees payment to the supplier upon meeting predefined terms.

How It Works:

1. Buyer and supplier agree on terms (e.g., delivery timelines, quality standards).
2. Buyer’s bank issues an L/C to the supplier’s bank, promising payment once documentary proof (e.g., shipping documents, inspection certificates) is verified.
3. Supplier ships goods and submits required documents to their bank.
4. Buyer’s bank reviews documents and releases payment if compliant.

Pros:

• Reduced Risk: Banks act as intermediaries, ensuring suppliers only receive payment after fulfilling obligations.
• Trust Building: Demonstrates commitment to professional transactions, especially with new suppliers.
• Flexibility: Suitable for large orders (e.g., $50,000+), where financial risk is significant.

Cons:

• Complexity: Requires meticulous documentation. Any discrepancy (e.g., typos in paperwork) can delay payment.
• Higher Costs: Bank fees typically range from 1%–5% of the transaction value.
• Time-Consuming: Document verification may take 1–3 weeks, slowing the procurement process.

When to Use L/C:

• High-value orders where financial security is a priority.
• Working with first-time suppliers in China.
• Industries with strict compliance requirements (e.g., medical devices, machinery).

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2. Telegraphic Transfer (T/T)

A direct bank-to-bank transfer, often structured with partial upfront payment and balance upon delivery.

Common Payment Structures:

• 30% Deposit, 70% Balance: The buyer pays 30% upfront to secure production, with the remaining 70% paid after receiving shipping documents.
• 50/50 Split: Mitigates risk for both parties by splitting payment before and after delivery.

Pros:

• Speed: Transfers are usually completed in 2–5 business days.
• Lower Fees: Bank charges average $20–$50 per transaction, making it cost-effective for smaller orders.
• Simplicity: Minimal paperwork compared to L/C.

Cons:

• Risk of Non-Delivery: Upfront payments expose buyers to scams if suppliers fail to ship goods.
• Limited Recourse: Disputes over quality or delays can be challenging to resolve post-payment.
• Currency Fluctuations: Exchange rate changes may affect final costs.

When to Use T/T:

• Repeat orders with trusted suppliers.
• Small-to-medium transactions (e.g., $5,000–$30,000).
• Time-sensitive shipments where delays are unacceptable.

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3. Escrow Services

A third-party platform holds funds until the buyer confirms satisfactory receipt of goods.

How It Works:

1. Buyer deposits payment into the escrow account.
2. Supplier ships products and provides proof of shipment.
3. Buyer inspects goods and approves release of funds to the supplier.
4. Escrow service transfers payment, typically within 1–2 days of approval.

Pros:

• Enhanced Security: Funds are protected until the buyer verifies product quality and delivery.
• Dispute Resolution: Many escrow providers offer mediation services for conflicts.
• Transparency: Real-time tracking of payment and shipment status.

Cons:

• Higher Fees: Service charges range from 1%–10%, depending on transaction size and platform.
• Limited Adoption: Not all Chinese suppliers accept escrow, especially smaller factories.
• Inspection Challenges: Buyers must promptly inspect goods to avoid payment delays.

When to Use Escrow:

• First-time transactions with unverified suppliers.
• Low-to-mid-volume orders (e.g., $1,000–$20,000).
• Niche or custom products requiring quality assurance.

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Key Comparison Factors

Factor	L/C	T/T	Escrow
Risk to Buyer	Low (bank guarantees)	Moderate (upfront payment)	Low (funds held in escrow)
Cost	1%–5% + bank fees	$20–$50 per transfer	1%–10% service fee
Processing Time	2–4 weeks	2–5 days	3–7 days (after approval)
Documentation	Complex (strict compliance)	Minimal	Moderate (platform-dependent)
Best For	High-value, high-risk orders	Trusted suppliers, urgent shipments	New suppliers, quality-critical orders

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Choosing the Right Method

Consider these questions:

1. Order Value: Escrow and T/T are more practical for smaller orders, while L/C justifies its costs for large transactions.
2. Supplier Relationship: Established partnerships favor T/T, whereas new suppliers warrant Escrow or L/C.
3. Urgency: T/T is fastest; L/C’s documentation process may cause bottlenecks.
4. Product Complexity: Custom-made items often require Escrow for quality assurance.

For buyers with limited resources, start with Escrow for trial orders, then transition to T/T as trust builds. Always verify suppliers through video calls, factory audits, or third-party inspections (e.g., SGS, Bureau Veritas) to minimize risks regardless of payment method. Platforms like Alibaba.com and Global Sources often integrate Escrow options, streamlining the process for e-commerce sellers. By aligning payment terms with your risk tolerance and operational needs, you can build a resilient supply chain from China.