Payment terms in garment manufacturing: T/T, LC and deposits explained

Garment orders are paid in one of three common ways: a bank transfer (T/T), usually split into a deposit before production and a balance around shipment; a letter of credit (LC), where the buyer’s bank promises to pay once the supplier presents the agreed shipping documents; or, for established buyers, open account, paid 30 to 90 days after shipment. Each moves risk between buyer and supplier in a different way. A careful buyer ties every payment to something checkable: an approved sample, a passed inspection or a shipping document.

The five payment methods and where the risk sits

The US International Trade Administration’s Trade Finance Guide sets out five primary methods for international sales and puts the conflict simply: the seller wants to be paid as early as possible, and the buyer wants the goods before paying. Every method is a compromise between those two positions.

SEKO Logistics, in its guide to exporting from Bangladesh, notes that letters of credit remain the preferred method for many Bangladeshi exporters, with T/T also common for established relationships. That matches what most new buyers are offered: T/T with a deposit, or an LC.

How T/T with a deposit works

A telegraphic transfer is an ordinary international bank transfer, now usually sent over the SWIFT network. It is fast and cheap, and it gives the buyer no protection once the money has gone. In garment orders it is usually split into stages.

• Sample payment. Where samples are charged, they are usually invoiced separately from the bulk order.
• Deposit on order confirmation. The supplier uses it to book fabric and trims, which have to be bought before cutting and are the largest part of a garment’s cost. Our cost guide shows the published split between fabric and making.
• Balance. Paid either before the goods leave the factory, after an inspection, or against a copy of the bill of lading once they have shipped.

The size of the deposit varies by supplier, order size and relationship, and there is no standard percentage you should accept without discussion. What matters more is what each payment is tied to. A deposit should be paid only after the factory is named, the sample is approved and the price, quantities and delivery date are in a signed proforma invoice. A balance paid before shipment should follow a passed final inspection, carried out by someone you trust, against the approved sample. A balance paid against a copy of the bill of lading proves the goods have shipped, but not that they are right, so it still needs an inspection report behind it.

How a letter of credit works

A letter of credit is a commitment by the buyer’s bank to pay the supplier, provided the supplier presents the documents the LC lists and every term is met. The process described in the Trade Finance Guide runs like this:

1. The buyer and supplier agree the sale, including payment by LC.
2. The buyer applies to its bank, which issues the LC in favour of the supplier.
3. The supplier’s bank checks the LC and passes it to the supplier.
4. The supplier ships and presents the required documents to its bank.
5. The banks check the documents against the LC. Discrepancies must be corrected.
6. The buyer’s bank pays, and releases the documents the buyer needs to collect and clear the goods.

The single most important fact for a buyer: in LC transactions, banks deal in documents only, not goods. The guide is explicit that banks are not concerned with the quality of the goods. If the documents comply, the bank pays, whatever is in the cartons. An LC protects the buyer only as far as the documents it demands.

So a garment buyer writes the LC to include the evidence that matters:

• An inspection certificate issued by a named inspection company or the buyer’s own representative, stating the goods passed at an agreed AQL. Our quality control page explains what a final inspection covers.
• A latest shipment date and an expiry date, so late goods do not qualify for payment.
• Whether partial shipments are allowed.
• The proof of origin your market needs for preferential duty, so it arrives with the goods.
• Exact descriptions, quantities and packing that match the purchase order.

An LC is irrevocable unless it states otherwise, which means it cannot be changed or cancelled unless the buyer, the banks and the supplier all agree. It costs more than a transfer, because both banks charge fees, and the documents are, in the guide’s words, detailed and prone to discrepancies. For small orders the fees can be a large share of the value.

Why letters of credit are common in Bangladesh

Much of Bangladesh’s export garment industry finances its materials through the back-to-back LC. The factory receives the buyer’s export LC, sometimes called the master LC, and uses it as collateral for its bank to open a second LC to import fabric and trims on credit. That lets a factory buy materials for an order without paying for them out of its own cash first. Under Bangladeshi rules, as reported by The Business Standard, back-to-back LCs are for 100% export-oriented factories holding bonded warehouse licences.

For a buyer this has two consequences. For a factory with a bond licence, your LC can fund the fabric for your order. And a factory that cannot use back-to-back finance may ask for a larger cash deposit instead. Neither is a warning sign on its own; ask why the supplier proposes the terms it does.

Documentary collections: the middle route

In a documentary collection, the supplier ships and hands the shipping documents to its bank, which sends them to the buyer’s bank with instructions to release them only against payment (documents against payment, D/P) or against the buyer’s signed promise to pay on a future date (documents against acceptance, D/A). The buyer cannot collect the goods without the documents.

Collections are cheaper than LCs, and the International Chamber of Commerce publishes the rules banks use for them (URC 522). But the banks give no guarantee. If the buyer refuses to pay, the supplier is left with goods at a foreign port. For that reason, collections suit buyers and suppliers who already have a record together.

Open account and why new buyers rarely get it

Under open account the goods are shipped and delivered before payment is due, which the Trade Finance Guide says is typically 30, 60 or 90 days later. It is the most attractive option for the buyer and the riskiest for the supplier, who often protects itself with export credit insurance or by selling the invoice to a factoring company. It suits long relationships where the supplier knows the buyer’s credit well. A new brand asking for open account on a first order is asking the factory to lend it the whole cost of production.

Protecting the payment itself

The largest single payment risk for many buyers is not the supplier at all: it is fraud. In business email compromise, a criminal takes over or imitates an email account and sends new bank details just before a payment is due. Business email compromise, where a fraudster poses as a supplier and asks for payment to a new account, is one of the costliest frauds the FBI tracks; its complaint centre puts exposed losses above 55 billion US dollars worldwide over the ten years to December 2023.

• Pay only to an account in the name of the company you contracted with, never a personal account.
• Confirm any change of bank details by phone, using a number you already hold, not one in the email.
• Check that the bank account’s country matches the supplier’s.
• If a payment goes astray, contact your bank at once and ask for a recall; speed matters.

Currency, bank charges and timing

Three smaller details cause a surprising number of disputes. First, currency: agree it on the proforma invoice. If your bank converts from your currency, any exchange movement between deposit and balance is yours. Second, charges: an international transfer can pass through intermediary banks that each take a fee, so the supplier may receive less than you sent. Agree in writing who pays the sending, intermediary and receiving charges, and send enough to cover them if the supplier is to receive the full amount. Third, timing: a transfer can take a few working days to arrive, and a balance that lands after the vessel’s cut-off can cost you the sailing. Pay the balance early enough for the funds to clear before loading.

What to insist on, whatever the method

1. A signed proforma invoice or contract naming the factory, the price, the payment terms and the Incoterm.
2. Payments tied to milestones you can verify: sample approval, fabric booking, inspection pass, shipment.
3. A final inspection before the balance is released, or an inspection certificate required under the LC.
4. Clarity on currency, bank charges and who pays them.
5. A written agreement on what happens if inspection fails: rework, re-inspection, discount or cancellation.

What to do next

Before you agree terms, check who you are paying: our guide to verifying factory certificates shows how. Our page on how we work explains where the factory is named, the sample sealed and the inspection done in the order process. When you are ready, tell us what you want to make and we will set out the payment options for your order in writing.