An L/C (letter of credit)is a written document issued by a bank to the beneficiary to promise to pay a certain amount against the stipulated documents within a certain period of time according to the request and instructions of the applicant, or a guarantee issued by a bank stating that it is willing to purchase the beneficiary's draft on behalf of the applicant for the specified amount, date and documents.
In international trade, before the buyer and seller have established trust in each other, the buyer may be concerned about the seller's non-compliance with the contract after the advance payment, while the seller may be concerned about the buyer's non-payment after the delivery or presentation of shipping documents. Two banks are therefore brought in to act as guarantors for the parties, thus replacing commercial credit with bank credit. L/C is the instrument adopted by banks in this activity.
A T/T(telegraphic transfer) is a method whereby a remitting bank, upon the remitter's request, sends a telegram/telex/SWIFT to a branch or correspondent bank in another country (i.e., the receiving bank) instructing to remit a certain amount to the payee.
As a common settlement method in international trade, T/T has its risks.