Usance LC (Deferred LC) : Definition, How does

usance LC work, Charges & commission.

October 5, 2019 by Md. Alamgir

What is Usance Letter of Credit?

Usance Letter of credit also known as deferred letter of credit or Time LC or Term LC. When a usance or
deferred LC is opened, the payment of this LC shall be made after a predetermined time/ future date upon
presentation of the confirming documents.

Usance Letter of credit are opposite to Sight Letter of credit. In case of Sight Letter of credit, the payments
will be made to the seller when the confirming documents are presented to the issuing bank. On the other
hand, the payment of Usance LC shall be made upon receipt of the documents by issuing bank if the
documents are complied with the terms and conditions as mentioned in the original LC. In this respect, the
issuing bank accepts the draft and pays on the maturity date as per the terms of the LC.

Table of Contents:

 What is Usance Letter of Credit?

 How does Usance LC work?
 Charges of Usance LC
 Tenor of Usance LC

How does Usance LC work?

After getting the documents, the issuing bank accepts the drafts (if the documents are properly presented and
complied as per the terms of LC) and pays on the maturity date as mentioned in the letter of credit. The
buyer will get the goods on time but the payments will be at a later date. Usance Letter of credit gives the
importer a grace period for the payment of goods. In this respect, the buyer can avail the opportunity to re-
sell the goods within this extra time and could be easier for the buyer to make the payment before the
maturity date comes.

Usance LC is used when the importer is trustworthy and his credit rating is good to the exporter. Most of the
times between a exporter and importer have a close business relationship. Interest to be paid for the deferred
period.

The length of the Credit period is varied and the payment dates must be agreed by both parties. The usance
tenor is started after BL date or after sight depends on the agreement. Say for example, LC 30 days means
LC payment o be made after 30 days of BL date and If the BL date is 1st April, the payment due date will be
1st May. When “days after sight” term is used, it means the calculation of of usance starts from the date of
receipt of documents by the issuing bank.

Setting a calculable and undisputed payment date is very important. A collateral from the buyer may be
needed to ensure the payment of the goods. Seller would feel comfort if the payment is guaranteed by
collateral or any other way. However, the exporter may ask his bank for discounting the Usance LC in order
to receive the payment before the deferral period is over.
 Charges of Usance LC
The Usance LC charges is similar to other LC charges except for acceptance commission for the deferred
payment. The charges for opening a letter of credit is levied by the issuing bank and payable by the applicant
(importer). The common charges and commission are LC Opening commission, Negotiation/Payment
commission, SWIFT Charges, Amendment fees, discrepancies fees, delivery order fee, courier fee and
outstanding query fess. Following table shows some common LC Charges:

Charged by issuing bank at the time of opening LC and the rate would be 0.125%
Opening Commission on the total LC value. This charge is applicable from the date of issuing of LC to the
date of LC expiry. Opening Commission is charged only for single time.
This is charged for handling each presentation of documents under the LC. After
Negotiation/Payment getting the documents the bank checking all the documents and details in
Commission accordance with LC terms. This rate would be 0.125% on the invoice value of the
shipment.
SWIFT message issued by the financial institution to send message to each other on
the SWIFT Network (Society for Worldwide Inter bank Financial
SWIFT Charges
Telecommunication). This is charged to send LC electronically to the Beneficiary’s
bank. SWIFT charges normally charged by the issuing bank.
Amendment fee is charged by the issuing bank if any change is made with the
Amendment fee requested of applicant. Remember that any change made in the LC must be
supported by the beneficiary.
This is charged by the issuing bank when they receive documents for negotiation
and found that the documents are not complied with the terms of LC condition. The
fee is usually a flat amount. In addition of discrepancy charge, a swift charge also
Discrepancy Fee
apply to notify the beneficiary about the non-compliance. Issuing bank will notify
to the beneficiary’s bank regarding the charge and discrepancy. All discrepancy is
charged to the beneficiary and adjusted with the LC payment.
Acceptance Acceptance commission is charged for Usance/Deffered LC only. Acceptance
Commission commission is charged on quarterly @0.125%.

Tenor of Usance LC
A Usance payment LC provides the importer a deferred payment option. The tenor of payment is pre-
determined by the buyer and seller and can be classified into two based on their tenor. The usual tenors can
be as follows:

Payment within 90 days after the Bill Of Lading (B/L): This term indicates that after BL issued, the buyer
has a time of 90 days from the date of B/L to make the payment for the goods.

Payment within 30 days after sight: This terms represents that after receiving the documents from the
bank, the buyer will get 30 days for making the payment of the good
UPAS Letter of Credit: Definition, Uses, Cost &
Difference of UPAS and Usance LC.
Table of Contents:

  Definition of UPAS LC
 Conditions for using UPAS Letter of Credit
 Benefits to Exporter
 Benefits to Importer
 Cost of UPAS LC and Who will pay? 
 Credit Period of UPAS LC
 Difference between UPAS LC & Usance LC
 Conclusion

 Definition of UPAS LC
UPAS Stands for “Usance Payable at Sight” which is the combination of Usance LC and Sight LC. UPAS
LC is an Usance LC where payment is made on a sight basis to the exporter (beneficiary) but the payment of
the buyer (applicant) will be made to issuing bank at the usance term.

LC Comission is charged by issuing bank on a quarterly basis and the charge interest against LC settled
amount. Two sources of finance of UPAS LC are discounting the Export Bill and buyers credit. Buyers
Credit are using as a source of finance to settle the LC payment.

The situation of UPAS LC happens when the exporter/beneficiary want immediate payment for his
goods but the applicant may not have the facility with his bank to issue sight LC’s.

Under this Letter of credit, the exporter will get the payment at sight if the documents are credit
compliant. The importer will be charged interest, acceptance commission and other charged as per the
terms of LC for using this letter of credit.

On the other hand, if the applicant provides Usance LC and the beneficiary will arrange to get the bill
immediately from his bank, is called discounting. Usually, the discount fee and interest will be charged
against the account of the beneficiary.

Conditions for using UPAS Letter of Credit

 Customers using UPAS LC must satisfy all conditions exists in LC
 The customer will present the usance draft
 This usance draft will be paid by discount on at the sight basis

Benefits to Exporter
 The exporters will receive money immediately from the discounting bank
 Reduces Days Sales Outstanding (DSO) with receipt of payment “at sight”
  This LC increases the marketability of products by providing buyers with the incentive of extended
payment terms
 Keeps the integrity of the price, as the seller does not need to build in the cost of covering extended
payment terms
 Maintains quality of receivables because payment assurance is still secured through the letter of
credit
 Strengthens relationships with buyers by allowing for extended payment terms and the availability of
lower-cost financing

Benefits to Importer
 The interest rate is comparatively lower than any other finance
 It helps to optimize working capital
 Payment to be deferred up to 360 days
 Foreign currency may be bought at the preferential price
 This is a simple and convenient method
 This LC strengthens the relationships with the exporter by allowing for payment at sight.
 It enhances Days Payable Outstanding (DPO) by providing extended payment terms
 It helps to provide an additional source of liquidity

Cost of UPAS LC and Who will pay? 

The costs of UPAS LC and costs of other LC are almost similar. Following cost are associated with
LC/UPAS LC:

The cost will be paid by the importer:

 LC issuing Commission
  LC Transmission Charge
 Acceptance Commission
 Reimbursement Charge: As beneficiary usually claims full payment, reimbursement expenditure will
be borne by the applicant (issuing Bank)
 Interest on funding for UPAS LC

The cost will be borne by the exporter:

 LC Advising Charge
 LC Confirmation Charge.
 Discrepancy Charge
 Payment Charge

Credit Period of UPAS LC

UPAS Funding for raw materials would be extended to 180 days, but in case of capital machinery, this credit
term would be 180 days/ 270 days/ 360 days/ 720 days.
Difference between UPAS LC & Usance LC
The difference between UPAS LC and Usance LC are enumerated as follows:

1. In case of UPAS agreement the beneficiary will get benefit at sight, and in case of Usance LC the
beneficiary will get benefit after a certain period of time.
2. Both UPAS and Usance LC, the beneficiary enjoys usance facilities.
3. In case of UPAS LC the bank the bank will make payment at sight by creating a loan against
Importer but in case of Usance LC the payment will be made after a certain period of time.
4. Usance LC is the suppliers’ credit and UPAS LC is the buyers’ credit.

Conclusion
There is no basic difference between Usance Payable at Sight Letter of Credit and Traditional usance letter
of credit except for interest charge. In this respect, interest is charged additionally for using UPAS LC fund
i.e. LC payment made after a particular period of time. Under UPAS LC, the extended payment terms of
buyer don’t affect the exporter as exporter receiving payment on due time. The buyer pays its issuing bank at
the end of the payment term as mentioned in UPAS LC.