Letter of Credit (LC) vs. Escrow: Which Is Right for Your Business Transactions?

Making International Payments

Humanity has long been fascinated by the concept of trading goods, a curiosity that remains today. The routes, methods, and items exchanged have transformed over the years! But one constant remains: the need to find a fair means of payment for goods. When one nation deals in Euros while another uses Dollars or Pounds, vendors must have an easy and equitable way to trade goods for money. Today, we have moved far beyond the days of carrying bags of gold, salt, and spices to settle international transactions. Thanks to the digital age! The world today is far more interconnected than ever! This digitization enables payments to be transferred between countries and currencies with relative ease. Nevertheless, some of these methods are safer and better than many others. Let us discuss the letter of credit LC and Escrow. We will look at Letter of Credit vs Escrow! Particularly, for escrow service in the UAE, you can contact TrustIn!

Letter of Credit

A letter of credit, often abbreviated as L/C, is frequently utilized in international and domestic commerce as it assures that the buyer will remit payment to the seller promptly and for the agreed-upon amount. If the buyer fails to make the payment, the bank compensates the seller. An L/C may also be transferable, providing significant flexibility if either party's situation changes (such as in the event of a company merger) prior to completing the transaction. There are various types of L/Cs.

Pros: This method is expedient, with L/Cs typically issued within 1-2 weeks. The risk is quite low since the bank assures the payment. L/Cs are extremely beneficial in regions with volatile economic or political conditions.

Cons: L/Cs often incur substantial service fees from the participating banks, in addition to requiring significant paperwork and a protracted transaction process. Also L/C Limits are not available to the majority of the businesses.

Fees: Banks charge fees for each L/C, and if the L/C is renewable on an annual basis, the commission is also renewed. Fees differ among banks and are influenced by the perceived risk of buyer default. Although very secure, an L/C is among the priciest payment options available.

Escrow

Escrow is employed when two parties need to finalize a transaction, but there are concerns that one party may not fulfill their obligations. A neutral 3rd-party comes in to collect the money from 1 vendor, hold it till the deal is complete, and then releases it to the 2nd vendor.

Pros: Escrow serves as a demonstration of good faith. The seller is not obligated to send the goods until they are aware that funds are held in escrow, and the buyer has the right to withhold the release of funds if the product did not arrive or differs from what was ordered.

Cons: This process relies on the buyer's honesty in reporting the condition of the received product. Additionally, the buyer must promptly request the release of the funds. If the buyer is dishonest or somehow delays, the seller may resort to legal action. This can prolong the payment process.

Fees: Costs for escrow services vary considerably and may differ based on the item and the payment method.

Which Is Right for Your Business Transactions?

So, we looked at Letter of Credit vs Escrow. Every such payment method has its own Pros and Cons. No option is completely free from challenges. For significant transactions and the physical delivery of goods, it's advisable to use an intermediary (such as escrow agent or a bank). This will ensure that the buyer cannot take the goods without payment. Also, it will be ascertained that the seller isn't left unpaid for damaged or misrepresented items. If we talk of fees, escrow is better than letter of credit LC. Contact TrustIn for escrow service in UAE!