Letter of Credit vs T/T: Meaning and How to Choose

Key takeaways

• A letter of credit is the issuing bank’s undertaking to pay if complying documents are presented in time; a telegraphic transfer (T/T) is simply the importer wiring money at the agreed time.
• Under UCP 600, presentation is due within 21 days after shipment or by expiry, whichever is earlier, and each bank has up to five banking days to examine documents.
• The same invoice amount can mean very different cash timing and risk, so the contract should set the split, documents and deadlines together.

A letter of credit (L/C) is a bank undertaking to pay the beneficiary, usually the exporter, if the documents named in the credit are presented on time and match its terms. A telegraphic transfer (T/T) is not a bank promise. It is a wire the importer sends at the moment the contract sets. Under an L/C the bank looks at documents, not at the goods.

What a credit covers, and what it does not

The working rulebook is the ICC’s UCP 600. Banks examine documents on their face. They do not inspect quality, quantity on the quay, or market price. A complying presentation must be honoured. A discrepant one may be refused.

A confirmed credit adds the confirming bank’s undertaking to that of the issuing bank. An unconfirmed credit rests on the issuing bank. Neither lets the exporter look inside the buyer’s account.

The ICC publishes the UCP 600 framework here: https://iccwbo.org/news-publications/policies-reports/uniform-customs-and-practice-for-documentary-credits/

When money actually moves under T/T

T/T only fixes the moment of the wire. A common split is a deposit before production and the balance against copy shipping documents, or full prepayment. The bank moves funds. It does not compare the invoice with the bill of lading.

For the exporter, a deposit is cash before production. An open balance is buyer-default risk. For the importer, a deposit is advance-payment risk, and paying the balance after copy documents is the compromise.

Two clocks on a letter of credit

Article 14 of UCP 600 sets two different periods.

• Presentation: unless the credit says otherwise, transport documents must be presented within 21 calendar days after the shipment date, and not later than expiry. The earlier date controls.
• Examination: a nominated bank, a confirming bank, and the issuing bank each have a maximum of five banking days following the day of presentation to decide whether the presentation complies. Expiry during that window does not shorten the five days.

If the on-board date is 2 March and expiry is 30 March, presentation is due by 23 March when the credit is silent. If shipment is 20 March, day 21 falls on 10 April, but expiry on 30 March arrives first, so 30 March is the deadline.

A worked example on USD 50,000

Assume a commercial invoice of USD 50,000 and no other charges. No local-currency conversion.

On T/T at 30 percent deposit and 70 percent balance, USD 15,000 arrives before production. USD 35,000 is still outstanding until the buyer wires it after copy documents.

On a sight L/C for the same amount, the undertaking opens only if the required documents are presented within 21 days and before expiry, and they comply on their face. A discrepancy lets the bank refuse. Payment then depends on whether the applicant waives the discrepancy. Same invoice, different cash condition.

Point	L/C	T/T
Why funds move	Complying documents	Buyer’s wire
Bank’s job	Examine, then honour	Execute the transfer
Exporter’s risk	Discrepancy, bank or country risk	Unpaid balance
Importer’s risk	Goods differ from documents	Prepaid, no shipment
Cost and time	Issuance, advice, cures	Transfer fees

Mistakes that stall payment

Writing Incoterms in the contract and a different document list in the credit. The risk point and the paper the bank wants then diverge, and shipment can be clean while presentation fails. Read the term choice next to the Incoterms 2020 summary.

Letting the original bill of lading count, the consignee, or the freight notation clash with the credit. Sort the document type first in bill of lading vs sea waybill.

Treating the 21-day window and expiry as the same date. The five banking days belong to the examining bank, not to the exporter’s presentation clock.

Letting the certificate of origin or the invoice quantity drift from the credit. Match origin papers against how a certificate of origin is issued.

How to choose

On a first order, or when the amount is large and the counterparty is untested, a confirmed credit or a high deposit favours the exporter. On repeat business where discrepancies keep generating fees, a T/T balance is often simpler. The real work on an L/C is striking the draft before shipment: documents, presentation period, and partial shipments, line by line.

Summary

An L/C pays when documents match a bank undertaking. T/T pays when the buyer sends the wire. Presentation ends on the earlier of 21 days after shipment and expiry. Each examining bank has up to five banking days after presentation. Same invoice value can still lock cash at a different moment, so the contract should state the split, the documents, and the dates together.

FAQ

What is the key difference between an L/C and a T/T?

An L/C is a bank promise to pay against complying documents. With T/T the bank only moves money and does not check whether the invoice or bill of lading matches the contract.

What is the exporter’s risk on T/T?

An advance helps fund production, but any balance paid after shipment leaves the risk of late payment or non-payment with the exporter.

Are the five banking days part of the exporter’s presentation deadline?

No. They are the bank’s examination period. The exporter’s deadline is 21 days after shipment or expiry, whichever comes first.

When does an L/C make more sense?

For new buyers, large amounts or unknown credit, a confirmed L/C or a high advance favours the exporter. For repeat business where discrepancies keep adding fees, a T/T balance is often simpler.