A letter of credit is a bank instrument that pays the seller against conforming documents, which makes it strong on large, repeatable orders and slow and expensive on everything else. It checks paper, not goods. An escrow-style or milestone arrangement releases payment against evidence the two parties agree on, which fits smaller, first-time, or off-platform orders where an LC would be overkill. Both can fail, and the failures are different: an LC can pay against clean documents that describe a bad shipment, while a loose escrow can stall on a dispute with no neutral test to settle it. Tranchio sits in the middle for importers under LC scale, gating each release against agreed evidence and recording it, with a licensed provider moving the funds at launch.
You are placing an order with an overseas factory and someone has told you to use a letter of credit. Someone else has told you to use escrow. They are not the same tool, they fail in different ways, and one of them is probably wrong for the size of order you are actually placing.
What a letter of credit does
A letter of credit is a promise from a bank. Your bank (the issuing bank) agrees to pay the seller once the seller presents a specific set of documents that match the terms you wrote into the credit: a commercial invoice, a bill of lading, a packing list, sometimes an inspection certificate or a certificate of origin. The seller's bank checks those documents against the credit. If they conform, payment is made. If a comma is out of place, it is a discrepancy, and payment stalls until you waive it or the seller corrects the paper.
The thing to hold onto is what the bank is checking. It is checking documents. Under the governing rules (UCP 600), banks deal in documents, not goods. A letter of credit that names a bill of lading pays against a bill of lading that exists and conforms. It does not pay against the goods being right. You can read the mechanism in more depth in the letter of credit glossary entry.
An LC works well when the order is large, the relationship is repeatable, and both sides have banks willing to do the work. It gives the seller a bank's promise instead of your promise, which is often what unlocks the deal at all. It is genuinely strong on documentary fraud of the crude kind.
What escrow does
An escrow arrangement is simpler to picture. A neutral party holds the buyer's money and releases it to the seller when an agreed condition is met. The condition is whatever the two of you write down: delivery confirmed, an inspection passed, a sample approved. Nobody's bank underwrites anything. The protection comes from the money being committed but not yet released, and from the release rule being fixed in advance.
Escrow fits the orders an LC does not. A first order with a supplier you found three weeks ago. A US$18,000 run of samples. A deal where neither side wants to pay a four-figure bank fee and wait on a documentary examination. The release condition can be anything the parties trust, which is the strength and also the weakness.
Where each one fails
An LC fails on the goods. Because the bank checks paper, a seller can present a clean, conforming bill of lading for a container of the wrong thing, and the credit pays. Buyers have received a genuine, conforming document set and scrap inside the box. The LC did exactly what it promised and you are still out the money. An LC also fails on cost and speed: issuance fees, amendment fees for every change, and a process measured in weeks. On a US$20,000 order the fees alone can make it pointless.
Escrow fails on the release rule. If the condition is vague ("buyer satisfied"), a dishonest buyer can withhold release on a good shipment, or an honest dispute can freeze the money with no neutral test to break the tie. Plenty of low-cost escrow services also give you no real examination of the goods, so you are back to releasing against a photo and a promise. And who holds the money matters: an unlicensed party sitting on your funds is its own risk.
The comparison, laid out
| Letter of credit | Escrow / milestone | |
|---|---|---|
| Who holds the risk | Issuing bank pays; you carry goods risk | Neutral party holds funds; you carry rule-quality risk |
| What is checked | Documents against the credit | Whatever evidence the parties agree |
| Typical cost | Bank fees plus amendments, often four figures | Lower, a percentage or flat fee |
| Speed | Weeks; slow on any change | Fast; as fast as the release rule allows |
| Recourse if it goes wrong | Documentary dispute, hard once paid | Depends entirely on the written condition |
| Sensible minimum order | Large, usually six figures | Small to mid; workable from a few thousand |
Neither column is the safe one in every row. The right choice follows the order.
Where a milestone model sits
Most importers placing US$10,000 to US$150,000 orders are stuck between the two. An LC costs too much and moves too slowly for that range. Plain escrow is cheap but only as good as the release rule someone wrote at 11pm, and often checks nothing about the goods. This is the gap a milestone-gated model is built for, and it is the approach we describe in choosing a letter of credit alternative.
Tranchio structures the order into tranches. The buyer commits the whole order value up front, and each tranche is released to the seller only against evidence the two sides agreed in advance plus the buyer's approval: a signed purchase order, a third-party inspection report, a bill of lading. That fixes the weakness in loose escrow, because the release conditions are documents, not moods, and one of them is about the goods rather than the shipping. It is cheaper and faster than an LC because no bank is examining a credit.
Be precise about what Tranchio is. It is the control-and-record layer. It gates each release against the evidence and keeps a tamper-evident record of what was checked and when. It is not a bank and not an escrow agent, and it never takes custody of your money. A licensed payment provider moves the funds, and that goes live at launch; Tranchio is pre-launch and invite-only today. You can read how the record and the gating work on the security page.
The cost is 1.5% of the order the first time you buy from a given seller, dropping to 0.9% once you have completed US$50,000 with that seller. The seller pays nothing and receives every tranche in full, which matters because it removes the usual objection a factory raises when a buyer proposes anything other than a straight deposit.
Pick the tool by the order in front of you. Large, repeatable, both banks willing: an LC earns its cost. Small, first-time, or off-platform: an escrow-style release earns its speed, if the rule is written well. For the wide middle, milestone-gated payouts give you an evidence-based release without an LC's bill. If you want the practical version of that for a specific supplier, start with how to pay a Chinese supplier safely, and the pricing page has the fee detail in full.