Escrow vs Letter of Credit: Protecting Cross-Border Payments

When buyer and supplier are on different continents, neither wants to carry all the risk. Escrow and letters of credit (LCs) are the two most common ways to split it fairly.

How escrow works

The buyer pays into a neutral account. Funds are released to the supplier when agreed milestones — shipment, inspection, delivery — are confirmed. It is quick to set up and cost-effective for small and mid-sized orders.

How a letter of credit works

The buyer’s bank promises to pay the supplier once compliant shipping documents are presented. LCs are well understood worldwide and suit large orders, but documentary checks are strict and bank fees are higher.

Rule of thumb

• Orders under roughly $50,000 or new relationships: escrow.
• Large, repeat orders with established suppliers: LC or open-account terms with credit insurance.
• Either way: make inspection a release condition.