China Supplier Payment Terms: T/T, Letter of Credit and Escrow Compared

The payment method is where a supplier's promises meet your money, and it decides who carries the risk if something goes wrong. The three structures most buyers encounter — T/T, letter of credit and escrow — each shift that risk in a different direction, and choosing well is often worth more than any contract clause.

T/T: simple, but the risk sits with you

Telegraphic transfer is the default because it is cheap and fast. The most common structure is 30/70: a 30% deposit up front and the 70% balance against a copy of the bill of lading or before release of goods. But a T/T payment is a bare bank transfer — the bank guarantees nothing about the goods, and the moment you wire the deposit, that money is in the supplier's control. Full payment in advance is the riskiest version of all, because it removes your only real leverage.

Letter of credit: the bank steps in

A letter of credit replaces the supplier's promise with the bank's. Under an irrevocable L/C the issuing bank's undertaking to pay is independent of the underlying sale contract, and it pays against documents that comply with the credit. The governing rules are the ICC's Uniform Customs and Practice for Documentary Credits, UCP 600, which came into force on July 1, 2007. The key discipline to remember is that an L/C is document-based: the bank pays against conforming documents, not against the goods themselves — which is why the documents listed in the credit must be exactly the ones that prove what you need proved.

Escrow and platform guarantees

Escrow holds the funds with a neutral third party and releases them when agreed conditions are met, such as a passed inspection. Platform trade-assurance programs operate on a similar logic: the platform holds or guarantees payment and releases it on the defined milestones. These are contract-based arrangements rather than bank guarantees, so the protection is only as good as the escrow terms and the counterparty's solvency. Read the release conditions carefully — a vague 'after inspection' clause is where disputes are born.

Which term for which situation

• New or unverified supplier, large deposit — prefer a letter of credit or escrow over an open T/T deposit.
• Established supplier, small repeat order — 30/70 T/T is reasonable and keeps costs down.
• Custom or high-value goods — an L/C gives you document control over specification and shipment.
• Anything with a large up-front payment — tie the deposit to verified milestones rather than paying it blind.

Anti-fraud rules that apply to every method

• Pay only to the bank account of the company named in the contract, and verify the account name matches that company exactly.
• Treat any mid-deal request to pay a different account — 'our main account is frozen, use this one instead' — as a red flag and verify it independently.
• Confirm the beneficiary details before wiring large amounts; a one-character difference in the account name is a classic diversion tactic.
• Keep written records of what each payment was for, so a later dispute or claim is easy to prove.

Structure the payment around verification

The payment terms should follow the verification, not lead it. If you have audited the factory and checked the company's records, a normal T/T is defensible. If you have not, let the payment method carry the risk for you — a letter of credit or escrow is the buyer's insurance for the gap between what you hope is true and what you have actually confirmed.

This content is general information to help you manage supplier risk. It is not legal advice. For a specific dispute or a contract you are about to sign, consult a licensed attorney.

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