1. Credit Foundation
Wire transfer (T/T) :
It is a commercial credit, and the transaction depends on the trust relationship between the buyer and the seller. The bank only acts as an intermediary for the transfer of funds and does not assume the responsibility of payment guarantee.
Credit (L/C) :
It is a bank credit. The issuing bank provides the payment promise to the seller with its own credit. Even if the buyer defaults, the bank still needs to pay the payment when the documents are compliant.
2. Risk Allocation
Wire transfer (T/T) :
Seller's Risk: In case of post-T /T (cash on delivery), the Seller shall bear the risk of the buyer's refusal to pay or delay in payment.
Buyer Risk: If pre-T /T (full payment in advance) is used, the Buyer may be exposed to the risk of non-performance by the seller.
Credit (L/C) :
Low risk: the bank is involved in the guarantee, as long as the seller submits documents in line with the terms of the letter of credit (such as bills of lading, invoices, etc.), you can get payment, and the buyer's risk of refusal to pay is borne by the bank.
3. Fees And Costs
Wire transfer (T/T) :
The fee is low, usually 0.1-1% of the amount transferred, including bank charges and telecommunications charges. However, large remittances may reduce the actual amount due to the deduction of intermediary bank fees.
Credit (L/C) :
The cost is high, and the comprehensive cost can reach 2%-4% of the transaction amount, including the opening fee, the change fee, the notification fee and the document audit fee.
4. Complexity Of Operation Process
Wire transfer (T/T) :
The process is simple, only the buyer needs to send payment instructions through the bank, and the funds arrive quickly (usually 1-3 working days), without complicated document audit.
Credit (L/C) :
The procedures are complicated, and the Uniform Customs and Practices for Documentary Credits (UCP600) must be strictly followed. The procedures include:
1. The buyer applies for the L/C and pays the deposit.
2. The seller shall deliver the goods and submit documents (such as bills of lading, insurance policies, etc.) as required by the L/C.
3. It takes about 15-30 days for the bank to check whether the documents are "consistent in documents and only consistent".
5. Application Scenario
Wire transfer (T/T) :
• Long-term cooperation and high trust customers.
• Small and medium-sized orders or emergency transactions.
• Countries with loose exchange controls (such as European and American markets).
Credit (L/C) :
• Buyers and sellers of large transactions or initial cooperation.
High risk regions (e.g. Africa, Middle East) or industries with strict documentation requirements (e.g. Commodities).
• Scenarios that require financing support (such as applying for a packaged loan through a letter of credit).
6. Other Core Differences
Document processing:
• Wire transfer does not require submission of trade documents, only account information.
• The core of the letter of credit is the document, and the bank only reviews the compliance of the document, which has nothing to do with the actual goods.
Flexibility:
• Wire transfer is supported by installments (e.g. 30% in advance +70% in balance).
• The terms of the letter of credit are fixed, and the amendment shall be negotiated by both parties and the amendment fee shall be paid.
Sum Up
Select Wire transfer: Suitable for businesses with a solid foundation of trust, small transaction amounts, or time sensitivity.
Select Letter of credit: suitable for high-risk transactions, large orders or scenarios requiring bank credit endorsement.
In practice, a hybrid payment (e.g. "T/T advance +L/C balance") can be combined to balance risk and cost.
