Letters of credit vs CAD vs TT: choosing payment terms with overseas suppliers

By the Innovote Trade Desk

The choice between a letter of credit, cash against documents and a telegraphic transfer comes down to one trade-off: who carries the risk that the other side fails to perform, and how much you pay a bank to take that risk off the table. A telegraphic transfer (TT) is the cheapest and fastest but offers no document control — paid in advance, you carry all the risk; paid after, the supplier does. A documentary collection (CAD) puts a bank in the middle to swap documents for payment, but with no payment guarantee. A letter of credit (LC) is the only one of the three where a bank actually promises to pay against compliant documents, which is why it costs the most and is the right buy for new relationships, large orders or unstable conditions. This guide compares the three on security, cost, cash-flow and document control, explains the ICC rules that govern them, and gives a decision framework for picking terms with an overseas supplier when importing into Egypt.

One framing point up front: payment terms are separate from your Incoterms and from your FX strategy, though they interact with both. Incoterms decide who bears cost and risk in transit; payment terms decide who bears the risk of non-payment or non-delivery; and the instrument you choose also fixes when your currency converts, which is the FX-exposure question. Decide all three deliberately.

The three instruments, in one view

The rest of this guide unpacks each row so you can choose with intent rather than by habit.

Telegraphic transfer (TT): cheapest, fastest, no document control

A TT is a bank-to-bank wire. There is no document examination and no bank guarantee — it simply moves money. Its risk profile depends entirely on timing:

• Advance TT (T/T in advance). You pay before the supplier ships. You now carry 100% of the performance risk — if the goods are short, late, wrong or never sent, your money is already gone and your only recourse is the supplier’s goodwill or a lawsuit in their jurisdiction. Suppliers love it; for a buyer it is the riskiest term and only sensible with a trusted, repeat counterparty or a small, low-stakes order.
• TT on open-account terms (e.g. 30/60/90 days after shipment). The supplier ships and invoices, you pay later. Now the supplier carries the risk that you do not pay. This is a strong buyer position, but suppliers grant it only after trust is built.
• Partial / staged TT. A common compromise: a deposit (say 30%) up front and the balance against a copy bill of lading or before shipment. It splits the exposure rather than removing it.

TT’s appeal is real: low cost (a flat wire fee, not a percentage), speed, and almost no paperwork. Its weakness is equally real: no neutral party verifies that documents — and therefore goods — exist before money moves. Use it where the relationship, not a bank, is your security.

Documentary collection (CAD): a bank in the middle, but no guarantee

In a documentary collection, the seller ships first, then hands the shipping documents to their bank (the remitting bank), which forwards them to your bank (the collecting bank) with instructions to release them only on your payment or acceptance (Trade Finance Global, URC 522). Critically, no bank guarantees payment — the banks are couriers and document-handlers, not guarantors. The control comes from the documents: without the bill of lading you usually cannot clear the goods, so the supplier holds leverage through the paperwork. There are two forms:

• D/P — documents against payment (the “CAD” most people mean). Your bank releases the documents only when you pay. You cannot get the goods without paying; the supplier does not get paid until documents are presented. Conversion of your EGP to the supplier’s currency happens around arrival.
• D/A — documents against acceptance. Your bank releases the documents when you accept a bill of exchange — a written promise to pay on a future date. You get the goods now and pay at maturity. This is effectively supplier credit, and it shifts risk back to the seller, who has parted with both goods and documents on nothing more than your acceptance.

Where the risk sits: under D/P the seller carries the main risk — if you refuse to pay, the goods are sitting at an Egyptian port far from home, and the seller must pay storage, re-export or distress-sell. Under D/A the seller is even more exposed. For the buyer, CAD is attractive: cheaper than an LC, and you inspect documents (and often arrange inspection of goods) before committing. The catch for the buyer is that a collection does nothing to guarantee the goods match the contract — only that the documents do.

Collections are governed by the ICC’s Uniform Rules for Collections, URC 522, in force since 1 January 1996 (ICC, URC 522). When CAD is used, the collection instruction should state that it is subject to URC 522.

Letter of credit (LC): the bank’s promise to pay

An LC is the only instrument here where a bank steps in as a principal obligor. The issuing bank (your bank) promises the supplier that it will pay against a presentation of documents that comply exactly with the LC’s terms. The supplier’s security is no longer your willingness to pay — it is a bank’s irrevocable undertaking. Under the governing rules, UCP 600, all credits are irrevocable; the revocable LC has effectively disappeared (ICC, UCP 600).

How it protects the buyer: the bank pays only if documents comply, so a supplier who ships nothing, or cannot produce a clean on-board bill of lading and the specified certificates, does not get paid. The LC turns “trust the supplier” into “trust the documents,” and documents are checkable. How it protects the seller: a creditworthy bank, not an unknown foreign buyer, owes the money.

Two LC choices matter for risk and cost:

• Confirmed vs unconfirmed. An unconfirmed LC carries only the issuing bank’s promise. A confirmed LC adds a second bank (usually in the seller’s country or a stronger jurisdiction) that independently promises to pay even if the issuing bank fails (Emerio Banque). Confirmation is what an overseas supplier asks for when they are uneasy about a bank’s country risk — relevant for Egypt during FX-tight episodes — and it adds the confirming bank’s fee. As the buyer you pay for the protection your supplier demands; in return, confirmation can be the thing that secures supply and decent pricing in a stressed market.
• Sight vs usance (deferred). A sight LC pays when compliant documents are presented. A usance LC pays at a stated future date (e.g. 90 days after the bill-of-lading date), giving you supplier-financed credit and a fixed, foreseeable settlement date — which is also the date you can hedge against (see managing FX exposure).

The cost of all this is the LC’s downside: issuance fees, amendment fees if anything changes, confirmation fees if confirmed, and document-examination charges. And LCs are unforgiving — banks pay against documents, not goods, and a trivial discrepancy (a misspelling, a date out of window) can delay or block payment until it is fixed or waived. The exactness that protects you also demands precision from your supplier’s documents.

LCs are governed by the ICC’s Uniform Customs and Practice for Documentary Credits, UCP 600, in force since 1 July 2007 (ICC, UCP 600). The credit should state it is subject to UCP 600. Note that these are private ICC rules the parties adopt by contract — they apply because your LC says so, not by force of law.

The Egyptian regulatory backdrop you should know

The instrument you can use into Egypt has, in recent years, been a policy variable, not just a commercial choice:

• From 1 March 2022, the Central Bank of Egypt required importers to use LCs and stopped banks accepting documentary collections — read as a way to ration scarce foreign currency (Trade Finance Global; Daily News Egypt).
• On 29 December 2022, the CBE scrapped the LC requirement and restored documentary collections (Ahram Online).

So today all three instruments are available, and the choice is commercial again. But because the rules here changed twice within a year, confirm the current CBE import-financing position with your bank before you commit a payment term in a contract. This is general trade-process information, not financial or legal advice.

Current-as-of note: Regulatory statements reflect the position as of late June 2026. Egypt’s import-financing rules have changed materially since 2022 and the pound has floated since March 2024 — verify the live rules and rates with your bank and the Central Bank of Egypt.

A decision framework: which term, when

There is no universally “best” term — there is the right one for this supplier, order size and moment. Work through:

A practical progression: start a new overseas relationship on an LC, move to CAD as confidence builds, and graduate to TT on terms once the supplier is proven — stepping down the cost as you step down the risk. Match the instrument to the trust, not the other way round.

Cash flow: the term decides when your money is tied up

Security and cost are the headline differences, but for a working-capital-constrained importer the cash-flow profile often decides the choice. Each instrument locks up your money — or frees it — at a different point:

• Advance TT is the worst for buyer cash flow: your money leaves before the goods even ship, financing the supplier’s production with your capital and tying it up through the entire lead time.
• Sight LC ties up working capital from issuance, because most banks require margin (cash collateral) or a credit line to open the credit. Even before any document is presented, a slice of your liquidity is pledged against the LC.
• Usance LC and D/A are the friendliest to buyer cash flow: you receive the goods, sell or process them, and pay at a future maturity — effectively financing the purchase from the proceeds. The trade-off is that the supplier prices that credit in, and a usance LC still consumes your bank credit line.
• D/P (CAD) sits in the middle: you pay at arrival, so capital is committed for the shipping period but not before.
• TT on open-account terms is the best of all for the buyer — goods first, pay later, no bank margin pledged — but is the rarest because it requires the supplier to extend unsecured credit.

The point: two importers with identical risk appetites can rationally choose different terms purely because one is cash-rich and the other is financing growth. Read the cash-flow column alongside the security column.

The discrepancy trap: why LCs fail at the document stage

The most common reason an LC causes pain is not fraud or default — it is document discrepancies. Because banks pay against documents and not against goods, a presentation that does not match the LC’s terms exactly can be rejected, holding up payment until the discrepancy is corrected or the buyer waives it. Typical discrepancies that catch traders out:

• The presentation is late — documents tendered after the LC’s presentation period or expiry.
• A bill of lading is not “on board,” or shows a different port, vessel or date than the LC requires.
• Inconsistent data across documents — the company name, quantity or description spelt or stated differently on the invoice, packing list and B/L.
• A certificate is missing or names a different issuer than the LC specified (e.g. a certificate of origin, a halal certificate, an inspection report).
• The amount or quantity falls outside the tolerances the LC allows.

When documents are discrepant, the issuing bank may refuse to pay until you, the applicant, waive the discrepancy — which hands you leverage but also slows everything down and can sour the relationship. The defence is to agree the exact document list with the supplier before the LC is issued, keep the requirements achievable, and avoid over-specifying (every extra document is another chance for a mismatch). This documentary exactness is the flip side of the security an LC gives you: the same precision that stops a non-performing supplier getting paid will stop a performing one too if the paperwork slips. CAD and TT avoid this trap entirely — but only because they offer no payment guarantee to fail at.

How Innovote sources this

Choosing payment terms is part of how we structure a deal, not an afterthought left to the bank:

• We match the instrument to the relationship and the risk. New supplier or large first order, we structure toward an LC — confirmed where supplier or country-risk nerves warrant it. Proven supplier and smaller repeat orders, we step down to CAD or TT to cut cost. The term follows the trust.
• We line up payment terms with Incoterms and FX. The document set an LC demands must match the Incoterm (e.g. an on-board bill of lading), and the settlement date sets your FX conversion timing. We make those three decisions together so your LC documents are satisfiable and your currency exposure is dated.
• We pre-empt the discrepancy trap. Most LC pain is documentary — a date out of window, a misspelt name, a missing certificate. We specify the document requirements with the supplier up front so the presentation is clean and payment is not held up.
• We coordinate with your bank on current rules. Whether CAD or LC is available and how the CBE treats your goods is confirmed with your bank for your specific shipment. We structure the trade; we do not give financial or legal advice or guarantee a bank’s decision.

Tell us the supplier, the order size and how well you know them, and we will recommend a payment-term path alongside the grade, MOQ, lead time and landed-cost path.

FAQ

What is the difference between CAD and a letter of credit?
A documentary collection (CAD) uses banks as intermediaries to swap documents for payment, but no bank guarantees payment — if the buyer refuses, the seller is left holding goods at the port. A letter of credit adds a bank’s irrevocable promise to pay against compliant documents, shifting the risk to the bank. The LC costs more for exactly that reason. CAD is governed by URC 522; LCs by UCP 600 (ICC, URC 522; ICC, UCP 600).

Is an advance TT safe for the buyer?
It is the riskiest term for a buyer: you pay before the goods ship, so if anything goes wrong your money is already gone and your recourse is limited to the supplier’s jurisdiction. Use advance TT only with a trusted, repeat supplier or for small, low-stakes orders. For a new or unvetted supplier, an LC or at least a partial advance with the balance against documents is far safer.

What is the difference between D/P and D/A?
Under D/P (documents against payment) your bank releases the shipping documents only when you pay — you cannot clear the goods without paying. Under D/A (documents against acceptance) the documents are released when you accept a bill of exchange promising to pay at a future date — you get the goods now and pay later. D/A is effectively supplier credit and leaves the seller more exposed, so suppliers grant it only to trusted buyers.

When is a confirmed letter of credit worth the extra cost?
When your supplier is uneasy about the issuing bank’s country risk — which can apply to Egypt during FX-tight periods. A confirmed LC adds a second bank (often in the supplier’s country) that promises to pay even if the issuing bank cannot (Emerio Banque). The buyer pays the confirmation fee, but it can be what secures supply and competitive pricing when a supplier would otherwise hesitate.

Are letters of credit mandatory for imports into Egypt?
No, not currently. The CBE made LCs mandatory from 1 March 2022 and scrapped that requirement on 29 December 2022, restoring documentary collections (Ahram Online). All three instruments are now available as a commercial choice. Because the rule changed twice within a year, confirm the current position with your bank before committing a term.

Which payment term is cheapest?
A TT is cheapest — typically a flat wire fee rather than a percentage. CAD sits in the middle with collection-handling fees. An LC is the most expensive once you add issuance, amendment, document-examination and (if confirmed) confirmation fees. The cost ranking mirrors the security ranking: you pay more for more protection, so match the spend to the actual risk of the deal.

Innovote for Import & Export L.L.C. (“Innovote Global”) is an Egyptian B2B sourcing partner. This article is general trade-process information, not financial, banking or legal advice; ICC rules apply by contract and Egyptian import-financing rules change — verify current rules with your bank and the Central Bank of Egypt before acting. Part of our guide to importing into Egypt. Tell us the supplier, order size and relationship; we’ll recommend a payment-term path alongside grade, MOQ, lead time and a landed-cost path.

Byline: Innovote Trade Desk