For international buyers, managing payments to Vietnamese suppliers involves navigating both financial logistics and local regulations. Two of the most common payment methods—Telegraphic Transfer (T/T) and Letter of Credit (L/C)—offer different balances of risk and cost. Furthermore, complying with Vietnam’s “Red Invoice” rule is non-negotiable for legal and financial reasons. This guide breaks down these critical aspects to help you transact confidently and efficiently.
Understanding Your Core Payment Options: T/T vs. L/C
Choosing the right payment method depends largely on your relationship with the supplier, order value, and risk tolerance. Below is a detailed comparison of the two primary methods.
🔍 Telegraphic Transfer (T/T)
A Telegraphic Transfer (T/T) is a direct bank-to-bank wire transfer of funds. It’s a common, straightforward method but offers more protection to the supplier than the buyer.
- How It Works: The buyer instructs their bank to send a specified amount to the supplier’s bank account via electronic systems like SWIFT. Transfers are typically irrevocable and can take 3-5 business days to clear.
- Common Terms: The most typical structure is a 30% deposit paid before production begins, with the remaining 70% paid before shipment or upon presentation of a copy of the Bill of Lading. For trusted relationships, some buyers negotiate to pay 100% after shipment.
- Key Considerations:
- Buyer Risk: High. Once the money is sent, it is very difficult to recover if the supplier fails to deliver.
- Supplier Risk: Low. Payment is secured, especially with upfront deposits.
- Cost: Generally involves bank fees (often $25-$50 per transfer), but total costs can be lower than an L/C. Using modern services like Wise or Veem can sometimes reduce these fees compared to traditional bank wires.
- Best For: Smaller orders, repeat business with trusted suppliers, or situations where transaction speed and simplicity are priorities.
📜 Letter of Credit (L/C)
A Letter of Credit (L/C) is a bank-guaranteed payment, where the issuing bank promises to pay the seller upon presentation of documents proving the terms of the credit have been met. This method shifts the payment risk from the trading partners to their banks.
- How It Works: The buyer (applicant) requests their bank to open an L/C in favor of the supplier (beneficiary). The supplier’s bank may add its confirmation. The supplier receives payment after shipping the goods and presenting complying documents (e.g., bill of lading, commercial invoice) to the bank.
- Key Features:
- Bank Credit: It is based on the bank’s creditworthiness, which is typically higher than commercial (company) credit.
- Documentary Transaction: Banks deal only with documents, not the goods themselves. Payment is made if documents comply exactly with L/C terms.
- Primary Types: Irrevocable L/Cs (cannot be changed without all parties’ consent) are the standard. Confirmed L/Cs (with a second bank’s guarantee) offer the seller even more security but add cost.
- Key Considerations:
- Buyer Risk: Lower. Payment is only released if the supplier meets all contractual conditions documented correctly.
- Supplier Risk: Very Low. Payment is secured by one or two banks.
- Cost: Higher due to bank fees. Setting up an L/C can also be more complex and time-consuming. Vietnamese companies sometimes resist confirmed L/Cs due to the added cost and collateral requirements.
- Best For: Large-value transactions, dealings with new or less-familiar suppliers, or when the buyer requires a high degree of assurance regarding shipment terms.
Comparison at a Glance
To help you decide, here’s a quick comparison of the two methods:
| Feature | Telegraphic Transfer (T/T) | Letter of Credit (L/C) |
|---|---|---|
| Risk for Buyer | Higher (payment precedes goods) | Lower (payment upon proof of shipment) |
| Risk for Supplier | Lower (payment is secured) | Very Low (bank guarantee) |
| Cost | Lower (mainly bank transfer fees) | Higher (bank opening/advising fees) |
| Speed | Faster (3-5 business days) | Slower (setup + document processing) |
| Complexity | Simple | Complex, document-heavy |
| Best Suited For | Trusted relationships, smaller orders | New suppliers, high-value orders |
The Crucial “Red Invoice” Rule in Vietnam
Beyond choosing a payment method, you must understand and comply with Vietnam’s “Red Invoice” regulation. This is not a mere formality but a legal requirement with significant tax and financial implications for your supplier.
What is a “Red Invoice”?
A “Red Invoice” is the colloquial name for Vietnam’s official Value-Added Tax (VAT) invoice. It is a critical document that:
- Serves as proof of a legitimate transaction for tax authorities.
- Allows Vietnamese businesses to declare output VAT and account for revenue.
- Allows the buying company (your supplier) to deduct input VAT and account for the purchase as a legitimate business expense.
The VND 20 Million Bank Transfer Rule
The most important rule for international buyers is linked to payment value. According to Vietnamese regulations:
- For any single transaction (or multiple transactions with the same supplier on the same day) with a total value of VND 20 million (approximately $850 USD) or more, the buyer must make payment via bank transfer.
- Cash payments for these invoices are not allowed. If a cash payment is made, the Vietnamese supplier will not be able to deduct the input VAT or claim the expense, creating major financial and tax problems for them.
Why This Matters to You as a Buyer
- Non-Negotiable Requirement: Your supplier will insist on bank transfer for larger amounts because their financial compliance depends on it.
- Facilitates Smoother Transactions: Using T/T or L/C inherently satisfies this rule, making your payment compliant.
- Avoids Legal Risk: Ensuring your supplier can issue a proper Red Invoice for your payment protects them from legal penalties for using or trading illegal invoices, which can be severe.
Practical Recommendations for Secure Trade
- For New Suppliers or Large Orders: Start with an Irrevocable Letter of Credit (L/C). It provides security for both parties and forces clear agreement on all shipment terms upfront. Be prepared for the process to take time and incur higher fees.
- For Established, Trusted Relationships: Use T/T with Milestone Payments (e.g., 30% deposit, 70% before shipment). This is the most common and efficient method. To further protect yourself, tie the final payment to the receipt of a copy of the Bill of Lading.
- Always Use Bank Transfers: Regardless of the method (T/T or L/C), ensure payment is made electronically from your bank to the supplier’s bank account. This is mandatory for Red Invoice compliance on larger orders and provides a transaction record.
- Verify Supplier Bank Details: Always confirm bank account information directly with a known contact at the supplier to avoid fraud. Never rely solely on details in an unverified email.
- Request the Red Invoice: Upon completion of payment and delivery, formally request your official Red Invoice (VAT invoice) from the supplier. This is your proof of a legitimate business transaction.
By strategically choosing between T/T and L/C and strictly adhering to the Red Invoice bank transfer rule, you can build successful, compliant, and low-risk trading relationships with Vietnamese partners.
Have you encountered specific challenges when paying suppliers in Vietnam? Share your experiences or questions in the comments below.
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