Telegraphic Transfer vs Letter of Credit: Payment Terms for SME Importers

"Choosing Import Payment Terms: A Detailed Comparison Between Telegraphic Transfer (T/T) and Letter of Credit (LC) for Optimal Trade Management with IFG Shipping."

International trade payment terms are one of the most consequential decisions an SME makes in any import transaction. The method you use to pay your overseas supplier determines who bears the risk if goods are defective, late, or never delivered; how much working capital you tie up before or after shipment; and how long your goods spend in transit before you can resell them.

Two methods dominate international trade: Telegraphic Transfer (T/T), a bank wire payment, and Letter of Credit (LC), a bank payment guarantee. Each has clear use cases, and choosing the wrong one for a particular supplier relationship can cost you significantly — either through excess bank charges and administrative burden, or through unrecovered payment for goods that do not arrive as described.

What Is a Telegraphic Transfer (T/T)?

A Telegraphic Transfer — also called a bank wire transfer, SWIFT payment, or T/T — is an electronic transfer of funds between two bank accounts via the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network. The term “telegraphic transfer” dates from the telegraph era but remains the standard trade term for international bank wire payments in international commerce.

How T/T Payment Works in Import Transactions

The most common T/T structure is a split payment: a percentage paid in advance before production or shipment, and the balance paid after the goods ship. The standard split for Asia-sourced goods is30% deposit T/T in advance, 70% balance T/T against copy of the Bill of Lading. You pay 30% before the supplier starts production; the supplier ships the goods and sends you a copy of the Bill of Lading; you pay the remaining 70% before or upon arrival. The supplier controls the original Bill of Lading until your payment clears — they retain security over the goods while you get visibility of shipping documents before paying the balance.

Other T/T structures include 100% advance payment (highest risk for buyer, lowest cost), and 100% payment against documents (technically a documentary collection rather than a simple T/T). The 30/70 T/T split is the most commonly negotiated structure in Singapore SME import trade on the China, Malaysia, and Indonesia corridors.

T/T Payment Costs and SWIFT Charges

Singapore banks typically charge an outward telegraphic transfer fee of SGD 20–40 per transaction, plus a cable charge of SGD 15–30, plus any correspondent bank charges deducted by intermediate banks in the SWIFT routing chain. For SHA (shared) charges — the most common arrangement — each party pays their own bank. For OUR charges, the sender pays all fees including intermediary bank deductions. Remittance processing time is typically 1–3 business days for major currencies to major banking markets.

What Is a Letter of Credit (LC)?

A Letter of Credit is a written undertaking issued by the buyer's bank (the issuing bank) to pay the seller a specified amount, provided the seller presents compliant shipping documents by a specified date. The LC transforms the buyer's payment obligation into a bank payment guarantee — the seller relies on the issuing bank's credit rather than the buyer's. Letters of Credit are governed by the International Chamber of Commerce'sUniform Customs and Practice for Documentary Credits — UCP 600 (ICC, 2007), the ruleset incorporated by reference in most Singapore bank LCs.

How an LC Works Step by Step

The LC process: (1) Buyer and seller agree LC terms in the sales contract. (2) Buyer instructs their bank (issuing bank) to open an LC. (3) Issuing bank sends the LC to the seller's bank (advising bank). (4) Advising bank verifies and notifies the seller. (5) Seller ships goods and collects required documents: commercial invoice, full set of clean on-board Bills of Lading, packing list, certificate of origin, and any other documents specified. (6) Seller presents documents to their bank. (7) Bank checks for compliance with LC terms — under UCP 600, banks have 5 banking days to check presented documents. (8) If compliant, payment is triggered. (9) Buyer receives documents and uses original Bills of Lading to take delivery of goods.

Types of Letter of Credit

Three most common LC types in SME import trade: aSight LCrequires the issuing bank to pay immediately upon presentation of compliant documents. AUsance LC(deferred payment LC) allows the buyer a credit period — 60 or 90 days after BL date — giving time to sell goods before payment falls due. AStandby LCis a contingent guarantee — payment is only triggered if the buyer defaults on their primary T/T payment obligation — used in ongoing relationships where T/T is primary but the seller wants a fallback.

Comparing T/T and LC: Risk, Cost, and Use Case

The choice between T/T and LC is fundamentally a risk allocation decision. The right answer depends on your supplier relationship, order size, and banking environment.

Risk Profile: Who Bears What Risk Under Each Method

Under T/T 30/70: the buyer bears risk on the 30% advance if the supplier does not perform. After paying the 70% balance against copy BL, the buyer bears risk that goods do not match documents — quality or quantity issues discovered on arrival. Under an LC: payment is conditional on compliant documents, not cargo quality. An LC protects against non-shipment; it does not guarantee product quality. A seller who ships substandard goods but presents perfectly compliant documents will still receive LC payment — which is why LC is often combined with independent pre-shipment inspection.

Cost Comparison: T/T vs LC

T/T costs are low: typically SGD 50–100 total bank charges per outward payment from Singapore. LC costs are substantially higher. Issuing bank charges typically range from 0.1% to 0.5% of the LC value per quarter. For a USD 50,000 LC valid 90 days, the issuing bank fee alone might be USD 250–500. Add advising bank fees (USD 100–200), and potential amendment and discrepancy fees. Total LC transaction costs on a USD 50,000 first order can reach USD 500–800. For orders below USD 20,000–30,000, LC costs are disproportionate — T/T with 30% advance is more practical.

When to Use T/T

Use T/T for: established supplier relationships with proven on-time, on-spec delivery; repeat orders from the same supplier; low-value orders where LC fees are disproportionate; suppliers in countries with reliable banking systems (China, Malaysia, India, UK, US); and situations where LC processing time (typically 3–7 working days to open and advise) is a constraint.

When to Use a Letter of Credit

Use an LC for: first orders from a new supplier you have not independently verified; high-value orders where losing an advance payment would be material to your business; suppliers in countries with less reliable banking or legal enforcement; transactions where your own buyer requires LC-backed payment; and first-time exporters who need the bank's confirmation to satisfy their internal credit requirements. Under UCP 600, the issuing bank's obligation to pay is independent of the underlying commercial contract — even if you have a dispute, the bank pays on compliant documents. Structure any LC carefully.

Documentary Collection: A Middle Ground

Between T/T and full LC lies Documentary Collection (D/C), governed by the ICC's Uniform Rules for Collections (URC 522). Under Documents Against Payment (D/P): the seller ships goods and sends documents to their bank with instructions to release them to the buyer only on payment. The buyer cannot take delivery without paying. However, unlike an LC, no bank payment guarantee is involved — if the buyer refuses, the seller has goods at the destination port with no committed bank obligation to collect from. D/C suits established relationships where some document-handling control is wanted but full LC cost is not justified.

Open Account Terms: When You Are the Exporter

Open account means the seller ships goods and invoices the buyer, who pays after a credit period (30, 60, or 90 days). Open account puts maximum risk on the seller. Singapore exporters offering open account to overseas buyers should consider trade credit insurance available through Enterprise Singapore's trade finance partner schemes. TheLetter of Credit vs Open Account guidecovers the full risk framework for exporters.

Payment Terms and Their Connection to Incoterms

Payment terms (T/T, LC) and Incoterms (FOB, CIF, DDP) are separate but interact. Under FOB, the seller's risk ends at the origin port — T/T 30/70 suits this since the buyer manages freight from that point. Under CIF, the seller arranges freight and insurance — the seller bears freight cost risk, making an LC more important as protection against non-payment for a service already paid. TheIncoterms 2020 guideexplains how freight cost and risk allocation interact with your payment term choice.

FAQ: Telegraphic Transfer vs Letter of Credit

Choose the Payment Term That Matches Your Risk Tolerance

T/T for established suppliers, manageable order sizes, and efficient banking corridors. LC for new suppliers, high-value first orders, or transactions requiring bank-backed credentials. Documentary collection as a middle path when document control matters but full LC costs are not justified. IFG Shipping coordinates document release and freight delivery to align with your T/T payment milestones or LC presentation schedules.Request a freight shipping quote from IFGto discuss how your payment terms and freight process work together.

For a document-controlled option, see how a documentary collection (D/P vs D/A) releases goods only on payment or acceptance.