LC vs TT vs DP: How We Actually Get Paid in Commodity Trade

Last month a buyer in Lagos asked me to ship 4 containers of Super Kernel on DP terms. First-time buyer. No history. I said no. He pushed back hard, said his bank charges for LCs were killing his margins. I get it. But I've been burned on DP before, and once you've watched a container sit at destination port for 63 days while a buyer "arranges funds," you stop being flexible about payment terms.

So let's talk about how money actually moves in commodity trade. Because every week I get emails from procurement managers who think LC, TT, and DP are interchangeable. They're not. The payment method you pick decides who carries the risk, how fast the deal closes, and honestly, whether the deal happens at all.

TT: Fast, Cheap, and Trust-Based

TT stands for Telegraphic Transfer. It's just a wire. SWIFT MT103 from buyer's bank to seller's bank. That's it.

Most of our repeat business runs on TT. A buyer in Dubai who's done 40 containers with us over three years? He pays 30% advance TT, 70% TT against scanned copies of BL. We trust him. He trusts us. The whole process from contract to payment closure takes maybe 25 days.

The split matters though. 30/70 is standard for rice. Some buyers want 20/80, a few aggressive ones push for 10/90. Here's the thing — if you're a buyer asking for 10/90 on your first deal, no serious exporter is taking you seriously. The advance isn't just money. It's a signal that you're committed and your bank actually lets you move USD without drama.

TT works when:

• Both parties have a track record
• The order value is manageable (say under $200K)
• Buyer's country doesn't have heavy forex controls
• You're not shipping to a destination with messy port clearance

Where TT falls apart: first-time buyers in countries with unstable banking, or large-volume contracts where the seller can't afford a default. I won't ship 10 containers to a new buyer on TT. Doesn't matter how nice the email is.

LC: The Adult in the Room

Letter of Credit. The instrument everyone complains about and then uses anyway when the deal is big enough.

An LC commodity trade transaction works like this: buyer's bank issues a guarantee that says "if the seller presents these exact documents within this exact timeframe, we pay." The seller's bank confirms it (sometimes), the goods ship, documents go through banking channels, payment releases.

It's slow. It's expensive. A confirmed irrevocable LC at sight can cost the buyer anywhere from 0.5% to 2.5% depending on the issuing bank and country risk. For a buyer in, say, Algeria or Bangladesh, LC charges can eat real margin.

But LCs solve the trust problem. When I ship to a new African buyer for a 25-container order, I'm not taking that risk on a wire. I want a confirmed LC from a top-tier bank — Emirates NBD, Standard Chartered, HSBC — confirmed by a bank I trust here in Karachi. If something goes sideways, I'm dealing with banks, not chasing a buyer through WhatsApp.

The gotcha with LCs is document discrepancies. I've seen LCs delayed 5 weeks because someone typed "Basmati Rice" instead of "BASMATI RICE" in capitals. The bank doesn't care that it's the same product. They care about exact compliance. I got this wrong on my third LC ever — submitted documents with a phytosanitary certificate dated one day after the BL date and the bank flagged it. Lesson learned: read the LC three times before the goods leave the warehouse.

DP: Where Most Disputes Live

Documents against Payment. Buyer's bank holds the shipping documents and only releases them to the buyer after payment. Sounds reasonable on paper.

In practice? DP is where I've lost the most sleep. Because if the buyer refuses to pay, the goods are already at destination port. Now you're paying demurrage, looking for a backup buyer, or shipping the container back at your own cost. There's a famous saying in our industry — DP is just TT with extra steps and worse outcomes.

I use DP only with buyers I know but where the order size doesn't justify the LC cost. Or in markets where LC issuance is genuinely painful (parts of West Africa, certain Central Asian states). Even then, I want a 20-30% advance TT to cover my freight and at least break even if the deal collapses.

So What Should You Actually Pick?

Here's how I think about commodity payment terms when a new buyer reaches out:

First order, unknown buyer, value above $80K — confirmed irrevocable LC at sight. Non-negotiable. If the buyer can't open an LC, that tells me something about either their bank or their working capital. Both matter.

First order, unknown buyer, value under $80K — 30% TT advance, 70% TT against BL copy. Small enough that if it goes wrong, nobody dies. Big enough that the buyer's advance is real money.

Repeat buyer, any size — TT terms negotiated based on history. Some of my best buyers run on open account now, paying within 15 days of BL. Took us four years to get there.

Looking at TT vs LC purely on cost is the wrong question. The right question is: what's the cost of the deal failing? On a 4-container rice order to a new buyer in a country I've never shipped to, LC fees of $3,000 are insurance against a $140,000 problem. That math is easy.

The payment method conversation usually happens in the first three emails with a new buyer. And honestly, how a buyer responds to that conversation tells me almost everything I need to know about whether we'll do business. Buyers who understand why I'm asking for an LC, who push back politely with reasons, who suggest alternatives — those are the ones I want to work with for the next decade.

The ones who get offended that I won't ship on DP terms to a brand new account? They usually weren't going to pay anyway.