Payment terms are usually the last thing negotiated and the first thing that matters when something goes wrong. Buyers tend to think of them as a financing question. They are actually a risk allocation question, and the instruments available allocate risk very differently.
Here is what each one actually protects, what it costs, and where it fits.
Telegraphic transfer (T/T)
A direct bank-to-bank wire. Simple, cheap, instant, and completely unprotected once sent.
What it secures: nothing, from the buyer’s side. A wire is not reversible in any practical sense. Recovering funds sent to an overseas supplier who does not ship requires litigation in that supplier’s jurisdiction, which for most order values costs more than the order.
Where it fits: repeat suppliers you have verified and worked with; small orders where the exposure is genuinely acceptable; and the deposit portion of a split payment.
The common structure is 30% deposit on order, 70% balance against a pre-shipment inspection. The deposit lets the factory buy raw material. The balance gives you a decision point after an independent inspector has looked at the goods and before you have paid for them. That single condition - balance released against inspection, not against a shipping notice - does more practical good than most buyers expect.
What you should not do is pay 100% in advance to a supplier you have not physically verified. The request is common and the reasoning is often sincere. It is still the single largest source of total loss in international trade.
Letter of credit (LC)
A bank’s irrevocable undertaking to pay the seller against a specified set of documents, governed internationally by UCP 600.
What it secures - and this is the point most buyers get wrong: an LC protects the document set, not the goods. Banks deal in paper. If the seller presents documents that conform exactly to the LC terms, the issuing bank is obliged to pay, whether or not the steel inside the container is the right grade.
That is not a flaw. It is what makes the instrument work - it removes the bank from any judgement about commercial disputes. But it means the protection an LC gives you is entirely a function of which documents you require in it.
An LC that requires an invoice, a packing list and a bill of lading protects you against a supplier who never ships. An LC that also requires an inspection certificate issued by a named independent inspector protects you against a supplier who ships the wrong thing. The second one costs the same to open.
Useful variants:
- Sight LC - payment on presentation of conforming documents.
- Usance LC - payment at a defined period after presentation (30, 60, 90 days), giving the buyer a credit period.
- Confirmed LC - a second bank, usually in the seller’s country, adds its own undertaking. This matters when the issuing bank’s country risk is a concern for the seller, and it is what unlocks difficult counterparties.
- Transferable LC - allows the beneficiary to transfer part of the credit to a supplier. Common in intermediated trade; worth understanding if you are being asked for one.
Cost: issuance, advising, confirmation and amendment fees, plus the cash margin your bank holds. Budget broadly 1–3% of contract value across all parties, and treat amendments as expensive. A significant share of LCs are presented with discrepancies on first attempt, each of which triggers a fee and a delay.
Where it fits: higher-value orders, new counterparties, anything where the loss from non-performance would be material, and any transaction where a bank’s involvement gives both parties confidence to proceed.
Escrow
A neutral third party holds the funds and releases them when agreed conditions are met.
What it secures: the money, against milestones you define. Unlike an LC, escrow release conditions can be about anything you can define - a passed inspection, a delivered sample, a completed tooling run.
Cost: typically lower than an LC on modest values, and materially quicker to set up. No cash margin locked with a bank.
Where it is weaker: the arrangement is only as good as the institution holding the funds and the precision of the release conditions. There is no equivalent of UCP 600 giving you a globally recognised rulebook. If the release conditions are vague - “goods to be of satisfactory quality” - you have relocated the dispute, not resolved it.
Where it fits: first orders of moderate value; custom manufacturing where release should track development milestones rather than shipping documents; situations where an LC’s cost or lead time is disproportionate.
Bank guarantee
Distinct from the above: a guarantee is a promise to pay if a party fails to perform, rather than a mechanism for paying in the normal course.
- Advance payment guarantee - protects your deposit if the supplier never delivers.
- Performance guarantee - compensates you if the supplier delivers late or off-specification.
These sit alongside a payment instrument rather than replacing it. On large project supply they are common and worth asking for; on routine orders they add cost without much practical benefit.
Choosing
| Situation | Reasonable structure |
|---|---|
| Verified repeat supplier, routine order | 30/70 T/T, balance against inspection |
| First order, moderate value | Escrow with milestone release, or 30/70 T/T against inspection |
| First order, high value | Confirmed LC requiring an independent inspection certificate |
| Custom tooling and OEM development | Escrow tracking development milestones, with tooling ownership written into the contract |
| Project-critical, penalty-bearing supply | Confirmed LC plus a performance guarantee |
| Supplier demands 100% advance | Decline, or verify the factory physically first |
The clause that does the most work
Whichever instrument you use, one provision carries more weight than the choice between them:
Final payment is released against a certificate of inspection issued by [named independent inspector], confirming conformity to [named specification], prior to container sealing.
This works inside an LC as a required document, inside an escrow as a release condition, and inside a T/T structure as a balance trigger. It moves your decision point to before the goods leave the factory, which is the only point at which a problem is still cheap to fix.
Naming the inspector matters. “An independent inspection” invites a supplier to appoint someone accommodating. Naming SGS, Bureau Veritas, TÜV or an equivalent, and specifying who pays, removes the ambiguity.
A note on who holds the contract
If you are buying through an intermediary, ask a direct question: who is the counterparty on the sale and purchase agreement? If the intermediary takes title, your payment security relates to the intermediary - which may be a trading company with limited assets in a jurisdiction you cannot practically reach.
Under a brokerage structure, the contract is executed between you and the manufacturer, and the broker structures the terms and the banking instruments without standing in the middle of them. That distinction determines who you can actually pursue if performance fails, and it is worth establishing before terms are agreed rather than after. Our commercial brokerage service exists to structure exactly that.
If you are weighing payment terms on a live order, the Bulkliner brokerage desk will work through the structure with you against the specific counterparty and value involved.