T/T or letter of credit for a closeout export load

T/T or letter of credit: which one fits a closeout export?

For most closeout exports, T/T fits: the buyer wires a deposit before loading and the balance against shipping documents. A letter of credit fits large, repeat, well-described loads where the buyer cannot or will not pay in advance and the seller needs a bank's promise. For a single mixed as-is container, an LC usually costs more in fees, time and discrepancies than it saves.

Both are tools for one problem: the buyer and seller are in different countries, and someone has to trust the other first. T/T leaves that trust with the parties. An LC moves it to banks. A documentary collection uses banks as messengers but not as guarantors.

How a T/T deal works

A T/T is an international bank transfer sent over SWIFT. The bank moves money; it does not look at goods or documents. The trade builds protection around it with timing:

1. Seller issues a proforma with the Incoterm, price, deposit, balance and bank details.
2. Buyer confirms the bank details by phone and wires the deposit.
3. Seller loads the container, gets it to the port and receives the bill of lading.
4. Seller sends the buyer a copy of the bill of lading, the commercial invoice and the packing list.
5. Buyer wires the balance.
6. Seller confirms the balance is credited, then couriers the original bills of lading or tells the line to issue a telex release or sea waybill.

Because the original bill of lading controls who can collect the container at destination, the seller keeps control of the goods until the balance arrives. The buyer's protection is weaker: the buyer pays the balance after seeing documents, but before seeing the goods. That is why buyers inspect before loading or use a seller with history.

Costs are bank fees on each side, listed on each bank's fee schedule, plus any intermediary deductions. Agree the charge code (OUR, SHA or BEN) on the proforma.

How a letter of credit works

A letter of credit is the buyer's bank's written promise to pay the seller, provided the seller presents documents that comply with the LC's terms. Most LCs are issued subject to the ICC's UCP 600 rules.

1. Buyer and seller agree the LC terms in the sales contract: amount, documents, latest shipment date, expiry, port pair, description of goods.
2. Buyer applies to its bank, which issues the LC.
3. A bank in the seller's country advises it; if the seller wants a local bank's promise too, it adds confirmation.
4. Seller ships and presents the required documents to the bank before the deadline.
5. The banks check the documents against the LC. They check paper, not goods.
6. If the documents comply, the issuing bank pays (at sight or at a set date). If not, the bank lists discrepancies and the seller must fix them or ask the buyer to waive them.

Fees add up on both sides: the buyer's bank charges to issue the LC, and the seller's bank charges to advise it, to confirm it if asked, and for any discrepancies. Ask both banks for their fee schedules before you agree LC terms. Time adds up too: the buyer's bank must approve the credit line before it issues, and the LC then passes through the seller's bank before the seller can rely on it. Closeout loads often sell in days, which is the first problem.

The middle ground: documentary collection (D/P)

In a documentary collection under the ICC's URC 522 rules, the seller ships, then sends the documents through its bank to the buyer's bank with an instruction: release them only against payment (documents against payment, D/P). The buyer pays at its bank and receives the documents to collect the goods. Fees are usually lower than an LC, because the banks handle the documents but do not promise payment.

The catch: no bank promises payment. If the buyer refuses, the seller still controls the goods through the documents, but those goods are now sitting at a foreign port, running up demurrage and storage, and the seller has to find a new buyer there or ship them back. For closeouts that already sold at a thin margin, that is a bad position.

Comparison at a glance

Why LCs are rare for closeouts

• Descriptions. An LC needs a goods description that matches the commercial invoice. A closeout manifest of hundreds of mixed SKUs, sold as-is where-is, rarely lines up perfectly, and quantity tolerances must be written in.
• Counts. Manifest variance is normal in closeouts. If the LC says a quantity and the packing list differs, that can be a discrepancy.
• Speed. A load that sells this week cannot wait for an LC to be issued and advised.
• Cost. On a single container of modest value, fees take a large share of the margin.
• Inspection. Buyers often want a pre-shipment inspection certificate as an LC document, which adds time and a third party.

When an LC does make sense

• Large or repeat programs, for example a buyer taking the same category in several containers over months.
• Buyers in countries where paying in advance is restricted or where banks require LC cover for imports. Check the current rules in the buyer's country.
• New relationships at a value high enough that the LC's fees and paperwork are small next to the loss if the other side defaults, and neither side will pay or ship first.
• Loads with clean, consistent descriptions: one product, new stock, a fixed count.

If you do use one, ask your bank to review the draft LC before the buyer opens it, and remove any condition you cannot meet, such as a document only the buyer can issue.

Worked example: same container, three ways

Letters stand in for the money, because each deal sets its own figures. A Caribbean buyer agrees a 40-ft container of mixed new overstock at price P, FOB a US port.

• T/T. Buyer wires a deposit of D% of P. Seller loads and sends a BL copy, buyer wires the balance, P − (D% × P), and the seller requests the telex release once it is credited. Fees: wire charges only.
• D/P. Seller ships with no deposit and sends documents through its bank. Buyer pays P at its bank to take the documents. If the buyer's resale plans fall through, the container waits at destination while the seller looks for options.
• LC. Buyer applies for an LC for P. The seller's bank advises it. The packing list shows a few more cartons than the LC quantity, and the LC has no quantity tolerance: discrepancy. Payment waits until the buyer waives it.

The T/T route was the fastest. The LC gave the strongest promise, but only after the paperwork was right.

Mistakes to avoid

• Releasing the original BL before the balance is credited. The documents are your only control once the container sails.
• Accepting an LC with conditions you cannot meet, such as a certificate only the buyer's agent can sign.
• Writing exact quantities into an LC for a mixed load. Use a tolerance or describe by container and lot.
• Ignoring intermediary bank deductions. A short-paid balance stalls the release.
• Assuming D/P means the seller will be paid. It means the documents wait for payment; the money may never come.
• Treating a SWIFT copy as proof. Confirm credit in your own account; see how to spot a fake buyer.

Related reading

The full picture of payment methods is in how closeout buyers pay, and the broader risk view is in our payments and fraud guide. Sales terms that sit behind any of these methods are covered in contracts and NDAs in closeout deals. For the shipping document itself, see bill of lading. Exporters who want to buy closeouts on Skyline Dealz Marketplace can read our exporters page and request access as an approved buyer. Payment for a load on Skyline Dealz Marketplace is handled off the website, on terms agreed directly with us once your offer is accepted and the load is on hold for you.