Payment decisionLC vs Escrow
Short answer
For orders over $20,000, use a Letter of Credit (LC) when you trust the bank more than the supplier. Use escrow when you trust a third-party platform more than both banks.An LC is a bank guarantee of payment conditional on documents. Escrow is a third party holding funds until both sides confirm the terms are met. Both cost more than T/T and both take longer to set up. They are worth it when the amount at risk exceeds what you can absorb as a total loss.
Three verifiable facts
Fact 1 — An LC is a document check, not a quality check
Claim: A bank that issues an LC checks documents (B/L, invoice, packing list) against the LC terms. It does not inspect the goods. If the documents are correct but the goods are wrong, the bank still pays. The LC protects against non-shipment, not against wrong shipment.
How to verify: Read UCP 600 Article 5: “Banks deal with documents and not with goods, services or performance to which the documents may relate.”
Fact 2 — Escrow fees are typically 0.89%–3% of transaction value
Claim: Escrow costs vary by provider and order value. Alibaba.com charges a percentage for Trade Assurance orders paid through the platform. Independent escrow services charge a flat fee or percentage. The fee is borne by one or both parties depending on negotiation.
How to verify: Check Alibaba.com's current fee schedule for payment methods. Contact independent escrow providers (e.g., Escrow.com) for their fee structure.
Fact 3 — LC setup takes 3–10 business days and requires bank relationships
Claim: An LC requires your bank to issue or confirm the credit, which involves credit checks, documentation, and correspondent banking relationships. Setup time is typically 3–10 business days. Amendments (if you change the order) cost additional fees and time.
How to verify: Ask your business bank for their LC issuance timeline and fee schedule. Ask if they have correspondent banking relationships in China.
Bank timelines and fees vary by corridor, bank and currency — confirm with your own bank rather than treating these ranges as fixed quotes.
What is an LC (Letter of Credit)
A Letter of Credit is a bank guarantee. Your bank promises to pay the supplier if the supplier presents documents that match the LC terms exactly. The bank is the counterparty, not you.
Step 1
Buyer applies
Buyer requests LC from their bank
Step 2
Bank issues
Buyer's bank issues LC to supplier's bank
Step 3
Supplier ships
Supplier ships and presents documents
Step 4
Bank pays
If documents match, bank pays supplier
- The bank checks documents, not goods. A correct B/L + invoice + packing list = payment, even if the box contains rocks.
- LC terms must be written precisely. Any discrepancy between the LC and the documents triggers a rejection, which delays payment and may require amendment fees.
- LC amendments cost money and time. If you change the order after the LC is issued, you pay amendment fees.
What is escrow
Escrow is a third-party hold. The buyer sends money to an escrow provider. The provider releases the money to the supplier only when both sides confirm the agreed conditions are met (e.g., PSI pass, shipment confirmation, arrival).
Step 1
Buyer deposits
Buyer sends funds to escrow provider
Step 2
Supplier ships
Supplier produces and ships goods
Step 3
Buyer confirms
Buyer verifies goods / PSI pass
Step 4
Escrow releases
Funds released to supplier
- The escrow provider does not inspect goods. They verify that both parties agree the conditions are met. If the buyer and supplier disagree, the escrow provider may hold the funds until arbitration or mutual agreement.
- Escrow fees reduce your margin. Factor the fee into your cost calculation.
- Not all suppliers accept escrow. It is more common for first-time transactions or smaller orders.
When to choose which
| Letter of Credit | Escrow | |
|---|---|---|
| Best for | Orders $20K–$100K+ with established suppliers | Orders $20K–$50K with new or uncertain suppliers |
| What it protects against | Non-shipment, document fraud | Non-delivery, quality disputes (if conditions are written) |
| What it does NOT protect against | Wrong goods with correct documents | Disputes about what “quality” means without written criteria |
| Setup time | 3–10 business days | 1–3 business days |
| Cost | 0.5%–2% of order value + amendment fees | 0.89%–3% of order value |
| Who holds the risk | Bank (if documents match) | Escrow provider (until both sides agree) |
| Supplier acceptance | Requires supplier with banking relationships | Requires supplier willing to accept third-party hold |
Choose LC if: You have a business bank that issues LCs, your supplier has export experience, and your primary risk is non-shipment rather than quality variation.
Choose escrow if: You do not have LC-capable banking, your supplier is new or small, and you need a third party to hold funds until inspection.
Neither is enough if: You do not have written inspection criteria in the PI. Both LC and escrow rely on written terms. Without written criteria, you have a documentation dispute, not a payment dispute.