Why Do Exporters Prefer Telegraphic Transfer Over Letters of Credit for Payment

Despite the seamless speed of electronic transfers, which guarantees quick receiving of funds, many exporters still insist on using Telegraphic Transfer (TT) rather than Letters of Credit (LC). This insistence can stem from various factors, including trust, financial risks, and practical considerations. In this article, we explore the reasons behind this preference and delve into the different payment methods available during export transactions.

Understanding Payment Methods in Export Transactions

The payment method for export transactions can greatly influence the success of a deal. Different methods offer varying levels of security and convenience for both importers and exporters. Here are some of the most commonly used and secure payment methods:

Letter of Credit (LC)

A Letter of Credit (LC) is a financial instrument issued by a bank on behalf of an importer that guarantees payment to the exporter upon presentation of specified documents. This form of payment provides a high level of security for both the importer and exporter. The bank acts as a middleman, checking the accuracy of documents before releasing funds, which mitigates risks associated with the importer's creditworthiness.

Documentary Collection

In Documentary Collection, the exporter sends documents to a bank in the importer's country, instructing it to release the documents to the importer only upon payment. This method provides some security for the exporter but is less secure than an LC because the bank does not guarantee payment.

Cash in Advance

Cash in Advance is the most secure method for the exporter, as they receive payment before shipping the goods. However, it is the least attractive option for the importer, as they have no guarantee that the goods will be shipped.

Open Account

In an open account transaction, the importer receives the goods before paying the exporter. This method is the least secure for the exporter, as they have no guarantee of payment.

Escrow Services

Escrow Services involve a third-party holding the payment until certain conditions are met, such as the shipment of goods or the delivery of services. This method can provide some security for both parties.

Reasons Why Exporters Prefer Telegraphic Transfer (TT)

Telegraphic Transfer (TT) is a payment method where a bank transfers funds directly between parties using a secure electronic communication system. While it offers similar security as LCs, many exporters prefer TT due to several reasons:

Speed and Convenience

TT offers quicker access to payment compared to LCs, where banks are involved in verifying documents. For many exporters, this rapid transfer of funds is a significant advantage. Once the necessary conditions are met, the exporter can usually receive the payment within hours, rather than days or weeks, which can be crucial for maintaining cash flow and business operations.

Lower Costs

LCs involve bank fees for both the importer and exporter, which can add up to a substantial cost. TT, on the other hand, often has lower transaction fees, making it a more cost-effective option for both parties, especially for smaller or more frequent transactions.

Trust and Control

While trust is a subjective factor, many exporters choose TT because they can rely on the secure and straightforward system. Unlike LCs, where a third party (the bank) is heavily involved, TT provides a more direct and transparent payment process, giving exporters greater control over the transaction.

Control Over Terms and Conditions

Finally, TT allows exporters to set the payment terms more flexibly. Unlike LCs, where the bank has a significant say in the payment conditions, TT gives the exporter the ability to negotiate and set terms that suit their business needs.

Conclusion

The choice of payment method in export transactions is a crucial decision that can impact the profitability and security of a business. While Letters of Credit (LCs) provide the highest level of security, reflecting the creditworthiness and reliability of both parties, Telegraphic Transfer (TT) offers a balance of speed, convenience, and lower costs. Understanding the different payment methods and their implications is essential for any exporter looking to navigate the complexities of international trade and ensure the success of their transactions.