Letter of Credit vs T/T — Which Payment Term Is Right for Your Brand?
Payment terms determine when and how you pay for clothing imports. The two most common methods are Letter of Credit (L/C) and Telegraphic Transfer (T/T). Each has advantages depending on order size, relationship, and risk tolerance.
How T/T Works
T/T stands for Telegraphic Transfer. It is a direct bank transfer from your account to the manufacturer's account. This is the most common payment method for clothing imports.
Standard T/T terms are 30% deposit before production, 70% before shipment. The manufacturer requires a deposit to start production. You pay the balance when production is complete but before shipment.
T/T is simple and fast. You initiate the transfer through your bank. The manufacturer receives funds within 1-3 business days. There are no complex documents or bank intermediaries.
T/T cost is typically $20-50 per transfer regardless of amount. Some banks charge a percentage for large international transfers. This is usually 0.1-0.5% of the transfer amount.
How L/C Works
L/C stands for Letter of Credit. It is a financial instrument from your bank that guarantees payment to the manufacturer. The bank pays the manufacturer when conditions are met.
You open an L/C with your bank. The bank issues a commitment to pay the manufacturer. The manufacturer ships goods and presents documents to the bank. The bank verifies documents and releases payment.
L/C protects both parties. The manufacturer is guaranteed payment if they meet conditions. You are guaranteed that payment only happens if documents match requirements.
L/C cost is significantly higher than T/T. Banks charge 0.5-2% of the L/C value as issuance fees. There are also amendment fees, advising fees, and negotiation fees. Total cost is typically 1-3% of the order value.
T/T Risk for Buyer
T/T carries risk for the buyer. Once you transfer the deposit, the money is gone. If the manufacturer fails to deliver or delivers poor quality, recovering your deposit is difficult.
The 70% balance payment before shipment also carries risk. You pay before seeing the goods. If quality is poor or shipment is delayed, you have limited recourse.
T/T requires trust in the manufacturer. This works for established relationships. For first-time orders, T/T carries significant risk.
T/T Risk for Seller
T/T also carries risk for the seller. The buyer may refuse to pay the 70% balance. The buyer may delay payment after goods are shipped. The buyer may dispute quality to avoid payment.
This is why manufacturers prefer L/C for large orders from new buyers. L/C guarantees payment regardless of buyer behavior.
L/C Risk for Buyer
L/C reduces risk for the buyer but does not eliminate it. The bank pays based on documents, not actual goods. If documents are fraudulent, the bank may pay for goods that do not exist.
L/C requires strict document compliance. If documents have minor discrepancies, the bank may reject payment. This delays shipment and causes frustration.
L/C ties up your credit line. Your bank may require collateral equal to the L/C value. This affects your ability to finance other operations.
L/C Risk for Seller
L/C reduces risk for the seller but adds complexity. The manufacturer must prepare documents exactly as specified. Any discrepancy causes payment delays.
L/C payment timing is slower than T/T. Documents must be presented, verified, and processed. This can add 1-2 weeks to payment timing.
Some banks in developing countries have limited L/C capability. This can cause delays or complications in L/C processing.
When to Use T/T
Use T/T for small orders under $10,000. L/C costs make L/C uneconomical for small orders. The 1-3% L/C fee is significant on small amounts.
Use T/T for established relationships. After several successful orders, you build trust. T/T becomes faster and cheaper than L/C.
Use T/T when you have verified the manufacturer. If you have visited the factory, checked references, and confirmed certifications, T/T is reasonable.
SDF Clothing accepts T/T for orders under $10,000 from new buyers. For established clients, we accept T/T for larger orders.
When to Use L/C
Use L/C for large orders above $10,000 from new buyers. The protection justifies the cost. L/C guarantees payment only when conditions are met.
Use L/C when you lack trust in the manufacturer. If this is your first order and you have not verified the factory, L/C provides security.
Use L/C when your company policy requires it. Some corporations mandate L/C for all international purchases above a certain threshold.
SDF Clothing accepts L/C for orders above $10,000. We work with your bank to ensure smooth L/C processing.
Cost Comparison Example
Consider an order of $20,000. T/T cost is $30 for bank transfer fee. Total cost: $20,030.
L/C cost at 2% is $400. Additional fees for amendments and processing add $100. Total cost: $20,500.
L/C costs $470 more than T/T. However, L/C provides protection that may justify the cost for large orders from new suppliers.
Hybrid Payment Options
Some buyers use hybrid terms. Common hybrid is 30% T/T deposit, 70% L/C at shipment. This reduces L/C cost while providing security for the balance.
Another hybrid is 50% T/T deposit, 50% T/T after inspection. You send an inspector to verify goods before paying the balance. This provides security without L/C complexity.
SDF Clothing is flexible on payment terms. We work with buyers to find terms that balance security and cost for both parties.
Documentary Collection
Documentary collection is a middle ground between T/T and L/C. Documents are sent through banks but without bank guarantee of payment.
The manufacturer ships goods and sends documents to their bank. The documents are forwarded to your bank. You pay upon document presentation. This provides some security but costs less than L/C.
Documentary collection costs are lower than L/C but higher than T/T. This option is less common but worth considering for medium-sized orders.
Payment Timing
T/T payment timing is flexible. You can negotiate payment schedules. Common options include 30-70, 40-60, or 50-50 split between deposit and balance.
L/C payment timing is fixed by the L/C terms. The manufacturer presents documents after shipment. Your bank processes payment within 3-5 business days of document presentation.
L/C adds 1-2 weeks to payment timing compared to T/T. This affects cash flow for both buyer and seller.
Building Trust for Better Terms
The best payment terms come from trust. Start with conservative terms for first orders. Pay deposits on time. Provide clear feedback. Build a relationship over time.
After 3-5 successful orders, manufacturers often offer better terms. They may accept lower deposits or longer payment windows. They prioritize reliable buyers.
SDF Clothing offers progressive terms. First orders use standard 30-70 T/T. Repeat clients enjoy 20-80 T/T or even 30-90 T/T for established relationships.
Need guidance on payment terms for your clothing imports? SDF Clothing works with T/T, L/C, and hybrid terms. We help you choose the right option for your situation and order size.
Discuss Payment Options →For a complete overview of clothing manufacturers in Bangladesh — including payment terms, financing, and trade finance — read our complete clothing manufacturers guide.