Difference between Letter of credit and Telegraphic Transfer (T.T)
1. Benefit of Letter of credit for Both buyer and seller are given below:
Letter of credit advantages for the seller:
1. The seller has the obligation of buyer's banks to pay for the shipped goods;
2. Reducing the production risk, if the buyer cancels or changes his order
3. The opportunity to get financing in the period between the shipment of the goods and
receipt of payment (especially, in case of deferred payment).
4. The seller is able to calculate the payment date for the goods.
5. The buyer will not be able to refuse to pay due to a complaint about the goods.
Letter of credit advantages for the buyer
1. The bank will pay the seller for the goods, on condition that the latter presents to the bank
the determined documents in line with the terms of the letter of credit;
2. The buyer can control the time period for shipping of the goods;
3. By a letter of credit, the buyer demonstrates his solvency;
4. In the case of issuing a letter of credit providing for delayed payment, the seller grants a
credit to the buyer.
5. Providing a letter of credit allows the buyer to avoid or reduce pre-payment.
Difference Between Letter of Credit & T.T:
TT means Telegraphic Transfer, Telex Transfer or Wire Transfer, the transfer of funds from one bank
account to another by electronic means. A wire transfer or Telegraphic Transfer is made when you
are ready to pay for goods or services received. The transfer is usually irrevocable such that the
receiver is protected against a return payment. Once a transfer is received it is ok to ship goods,
deliver services, or sign closing documents at time of sale. A wire transfer usually costs under USD 50
to complete and can settle same day or two days if in foreign currency.
LC means "Letter of Credit," an instruction from the buyer to a foreign bank to pay the seller a sum
of money when certain conditions are met. A Letter of Credit is used to take the risk out of buying or
selling goods to a company that is unknown or possibly not creditworthy. The buyer opens the letter
of credit at his/her bank and delivers it to the seller. The seller then can take the L/C to his/her bank
to remove the credit risk in the transaction. A documentary L/C allows the shipment of goods or a
service to be rendered when bills of lading, affidavits of compliance are completed, or sworn
statements of performance done. The bank merely deals in the documents and passes payments as
a result. An L/C can take a week or more to set up. If it is a confirmed L/C it can take longer.
2. How Would You Open a Letter of credit?
1. The buyer and seller enter into a contract and agree that payment be made on the basis of
Letter of Credit
2. Buyer approaches DBS (issuing bank) to issue Letter of Credit in favor of the seller
3. DBS issues Letter of Credit which is advised through its branch or correspondent bank
(advising bank) in the seller’s country
4. Advising bank advises Letter of Credit to the seller
5. Upon receipt of the Letter of Credit, the seller prepares shipment and delivers documents to
6. Presenting bank dispatches documents to DBS for payment
7. DBS pays the presenting bank upon verifying the documents are in order
8. Upon receipt of payment, presenting bank pays the seller
9. Buyer pays the document amount to DBS
10. DBS forwards the documents to the buyer, who can now use them to obtain the goods