Letter of Credit, Escrow, or T/T: Choosing Payment Terms That Both Sides Accept

Compare letters of credit, escrow and telegraphic transfer by cost, protection and setup time — plus rules for structuring a first-order payment schedule.

The real problem

The buyer does not want to pay before the goods exist. The seller does not want to ship before the money exists. Every trade payment instrument is a different answer to that single standoff.

Telegraphic transfer (T/T)

A bank wire, usually split: a deposit (commonly 30%) before production and the balance against shipping documents or on arrival.

Documentary letter of credit (LC)

The buyer's bank undertakes to pay against documents that comply exactly with the credit's terms, governed by ICC UCP 600.

Escrow

A neutral party holds the funds and releases them when an agreed milestone is met (shipment proof, inspection pass, delivery confirmation).

Side-by-side

T/T Escrow LC

--- --- --- ---

Cost Lowest Medium Highest

Setup time Hours Hours Days

Seller protection Low High High (if documents comply)

Buyer protection Low High Medium

Bank credit line needed No No Yes

Practical rules

  1. Never send a 100% advance to a first-time supplier.
  2. Tie every release to a verifiable event: a signed inspection report, a bill of lading number, a delivery confirmation — not "when ready".
  3. Put the payment schedule in the contract with dates, not just percentages.
  4. Under an LC, have the draft credit checked before it is issued; amendments cost money and time.

On Prebro

Escrow is built into the deal room: funds are held against contract milestones and released on the event both sides agreed to, with the trail visible to buyer and seller. That removes the "who moves first" deadlock without an LC's paperwork.

*References: ICC Uniform Customs and Practice for Documentary Credits (UCP 600); ICC Incoterms 2020 introduction on payment vs delivery terms.*

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