Deferred Payment Letters of Credit and Usance LCs Explained

A deferred payment letter of credit allows an importer to receive goods now and pay at an agreed future maturity date while giving the exporter a bank undertaking that becomes payable after a complying presentation.

The payment period might be 30, 60, 90, 120 or 180 days. Longer tenors are possible where the issuing bank, applicant, beneficiary and transaction support them.

This structure is widely described as a usance LC. The terminology is often used loosely, however. Under UCP 600, a documentary credit can be available by sight payment, deferred payment, acceptance or negotiation. A deferred payment credit and an acceptance credit can both create future payment obligations, but their mechanics are different.

For importers, the commercial attraction is additional time to convert purchased goods into cash before paying the bank. For exporters, the value comes from replacing a future payment obligation from the buyer with a documentary undertaking from a bank, provided the terms of the credit are satisfied.

Sight LC vs. Deferred Payment LC

The difference is the payment date.

Under a sight letter of credit, a complying presentation is payable at sight according to the credit terms and the banking process applicable to the presentation.

Under a deferred payment LC, the beneficiary presents the required documents, the documents are examined, and payment is scheduled for a future maturity date specified by the credit.

Companies considering this structure can review Financely's usance letter of credit service for the commercial requirements involved in arranging a facility.

Deferred Payment LC vs. Acceptance Credit

These structures are frequently grouped together under the term "usance LC," but there is a technical distinction.

A credit available by deferred payment creates a payment undertaking due at the stated maturity without requiring an accepted time draft as the central payment mechanism.

A credit available by acceptance involves a time draft drawn in accordance with the credit. The relevant bank accepts the draft and becomes obligated to pay it at maturity.

Commercially, both structures can give the importer time and leave the exporter holding a future bank payment obligation.

The credit should state clearly how it is available. The maturity mechanics should also be drafted precisely enough that the parties can determine the payment date without argument.

A Simple 90-Day Deferred Payment Example

Assume a U.S. exporter sells industrial equipment to an overseas importer for USD 5 million.

The importer applies to its bank for the USD 5 million documentary credit.

The issuing bank opens the LC in favor of the exporter. The credit specifies the documents required and states the deferred payment terms.

The exporter manufactures or sources the equipment, ships it and presents the stipulated documents.

The banks examine the presentation against the LC.

If the presentation complies, the bank obligation runs to the stated maturity date. The exporter can wait for maturity or explore whether the payment undertaking can be financed before then.

At maturity, payment is made according to the credit and any relevant bank-to-bank reimbursement arrangements.

The Maturity Wording Matters

"90-day LC" is not sufficiently precise for a serious transaction.

Ninety days from what?

The tenor can be calculated from an agreed event such as:

• bill of lading date;
• shipment date;
• invoice date;
• date of presentation;
• a determinable date after sight; or
• another event specifically defined in the credit.

The drafting affects the exporter's cash cycle and the importer's effective credit period.

If an importer expects 90 days from shipment but the final credit produces a materially different maturity calculation, the transaction economics can change even though the headline tenor still says "90 days."

Why Importers Use Deferred Payment LCs

The importer is buying time.

A distributor can import goods, clear them through customs, move inventory into its distribution network and collect from customers before the LC reaches maturity.

A manufacturer can import raw materials, convert them into finished products and generate revenue before paying the issuing bank.

A commodity trader can purchase cargo, complete shipment and potentially resell the underlying goods before its deferred payment obligation falls due.

Used properly, the tenor aligns bank repayment with the operating cash cycle rather than requiring the importer to fund the entire purchase before the goods have generated revenue.

Why Exporters Accept Usance Terms

Buyers frequently ask suppliers for longer payment terms.

An exporter may be unwilling to ship USD 5 million of goods on an unsecured 90-day open-account basis but willing to accept a 90-day documentary credit issued by an acceptable bank.

The exporter still carries documentary risk. It needs to present the documents required by the LC without discrepancies that prevent or delay honor.

It also needs to assess the issuing bank, country exposure and whether confirmation is necessary.

The credit terms can therefore allow the exporter to accommodate the buyer's requested tenor without simply turning the sale into an unsecured foreign receivable.

Can a Deferred Payment LC Be Discounted?

Potentially, yes.

This is one of the most commercially useful features of a deferred structure.

An exporter might agree to a 120-day payment term because the importer needs four months of supplier credit. The exporter, however, may need cash immediately after completing shipment.

Once a complying presentation has created the relevant deferred payment undertaking, an eligible bank can consider advancing funds against that future obligation.

The bank financing the undertaking deducts its financing cost and pays the exporter before the original maturity date.

Whether this is available and on what terms depends on the issuing bank, confirming bank if any, country risk, tenor, currency, documentary status and the bank being asked to provide the financing.

Financely provides a separate overview of letter of credit discounting for companies that want liquidity before the contractual LC maturity.

Deferred Payment LC Discounting Example

Assume an exporter has made a complying USD 3 million presentation under a 120-day deferred payment LC.

The exporter can wait 120 days for the bank payment or request financing against the deferred undertaking.

If a bank approves the discounting, it calculates the financing cost for the remaining tenor and advances the resulting net proceeds to the exporter.

The underlying USD 3 million payment remains due at maturity according to the credit.

The exact economics depend on the bank risk being taken and the applicable funding spread. There is no universal LC discount rate.

Confirmation Can Change the Credit Risk

An exporter may be satisfied with the commercial buyer but unwilling to hold the issuing bank or country risk until maturity.

Where available, another bank can add its confirmation to the documentary credit.

Confirmation adds an independent undertaking from the confirming bank, subject to the credit and applicable rules.

This can also affect the economics of discounting. A deferred payment undertaking carrying acceptable confirming-bank risk may be considerably easier for an exporter to finance than an unconfirmed obligation on an issuing bank in a higher-risk jurisdiction.

Confirmation is not automatic. The confirming bank considers the issuing bank, country, transaction, tenor, available limits and pricing before accepting the exposure.

Deferred Payment LC vs. UPAS LC

The commercial objective of a UPAS structure is different.

UPAS means usance payable at sight. The importer receives a deferred payment period while the exporter is paid at sight through a bank financing arrangement.

This can be useful when the buyer wants 90 or 180 days of financing but the supplier refuses to extend usance terms.

The financing bank effectively bridges the timing difference. The exporter receives sight proceeds while the importer settles the financed obligation later according to the agreed structure.

A conventional deferred payment LC can achieve a similar commercial result if the exporter separately discounts the future payment undertaking, but the bank roles, pricing and documentary mechanics need to be reviewed transaction by transaction.

The Issuing Bank Still Underwrites the Importer

A deferred payment LC is a bank credit exposure.

The bank does not issue a USD 10 million usance LC merely because the applicant has a purchase contract and a supplier willing to receive it.

The issuing bank evaluates its customer and determines whether the LC can be issued under an existing trade facility or whether additional collateral or credit approval is required.

Underwriting can include:

• historical financial statements;
• current management accounts;
• existing bank exposure;
• cash flow and leverage;
• trade cycle;
• supplier and buyer information;
• underlying purchase contract;
• commodity or goods being financed;
• country and sanctions exposure;
• collateral;
• cash margin requirements; and
• repayment capacity at maturity.

An importer asking for 180 days usually creates more bank exposure than the same transaction payable at sight because the issuing bank remains committed for a longer period.

Companies seeking an arranged structure can review Financely's deferred payment DLC arrangement for importers and traders.

How Much Does a Usance LC Cost?

There is no standard percentage applicable to every credit.

Total cost can include:

• LC issuance commission;
• SWIFT and administrative charges;
• advising fees;
• confirmation fees where confirmation is required;
• deferred payment or acceptance commission;
• financing interest for the usance period;
• discounting charges if the exporter wants early cash;
• amendment fees;
• document handling charges; and
• advisory or facility-arrangement costs where external structuring is required.

Pricing depends heavily on credit.

A 90-day LC issued by a highly rated bank for a strong applicant in a straightforward jurisdiction will not price like a 180-day transaction requiring confirmation, collateral support and additional country-risk capacity.

Common Problems With Deferred Payment Credits

The Tenor Is Commercially Unworkable

A buyer can request 180-day terms even though the supplier priced the sale on the assumption of much earlier payment.

Financing cost should be modeled before the contract is signed, particularly if the exporter expects to discount the LC.

The Maturity Trigger Is Ambiguous

"90 days deferred" leaves too much unanswered. The credit should establish how the maturity date is calculated.

Documents Are Discrepant

The bank undertaking depends on documentary compliance. Incorrect shipping dates, inconsistent quantities, missing documents or other discrepancies can delay the point at which the beneficiary obtains a clean bank payment obligation.

Nobody Checked Discounting Appetite Before Shipment

An exporter can accept 120-day terms assuming the LC will be easy to discount, then discover that the issuing bank or country does not fit the proposed financier's credit policy.

Discounting appetite should be established before the exporter relies on early cash as part of its working-capital plan.

The Importer Has No LC Facility

A signed supply contract does not create issuing-bank capacity. If the importer has no approved LC line and insufficient collateral, bank underwriting has to be solved before the documentary credit can be issued.

When a Deferred Payment LC Makes Commercial Sense

The structure is particularly useful where:

• the importer needs supplier credit;
• the exporter wants bank-backed payment rather than unsecured open account;
• the goods can be sold or converted into cash during the usance period;
• the importer has sufficient bank credit capacity;
• the exporter can tolerate the maturity or discount the undertaking;
• the issuing bank is acceptable to the beneficiary or can be confirmed;
• documentary requirements are commercially achievable; and
• the financing cost fits within the transaction margin.

Deferred terms work poorly when they merely postpone a payment the applicant has no realistic capacity to make at maturity.

What Financely Does

Financely provides paid advisory for companies arranging documentary credit and trade finance facilities.

Depending on the mandate, our work can include:

• review of the underlying purchase and sale transaction;
• LC amount and tenor analysis;
• assessment of proposed payment mechanics;
• facility sizing;
• cash-flow and repayment analysis;
• draft LC term review from a financing perspective;
• issuing-bank and trade-finance-provider identification;
• collateral and credit-support analysis;
• confirmation analysis where required;
• discounting or refinancing analysis;
• lender-facing transaction package preparation;
• KYC and transaction-document coordination;
• term-sheet comparison; and
• coordination through underwriting and issuance.

Deferred Payment and Usance LC FAQ

What is a deferred payment letter of credit?

It is a documentary credit under which payment falls due at a determinable future maturity after the beneficiary makes a complying presentation. The credit specifies the method for calculating that maturity.

Is a deferred payment LC the same as a usance LC?

"Usance LC" is commonly used as a broad commercial term for credits involving future payment. Under UCP 600, deferred payment and acceptance are separate methods of availability. An acceptance credit normally involves a time draft, while a deferred payment credit does not require an accepted draft to create the deferred undertaking.

Can a deferred payment LC be discounted?

Potentially. A bank can consider prepaying or purchasing an eligible deferred payment undertaking after the relevant obligation has been incurred. Approval and pricing depend on the issuing bank, country, tenor, documentary status and financing bank.

Who pays the exporter at maturity?

The answer depends on how the credit is issued and with which bank it is available. Under a complying presentation, the issuing bank carries the undertaking prescribed by UCP 600, and a confirming bank adds its own undertaking where confirmation has been provided.

Can an importer get a 180-day usance LC?

Yes, where the issuing bank approves the tenor and the beneficiary accepts the terms. Longer tenor increases credit exposure and can affect issuance, confirmation and discounting costs.

Does the importer need collateral?

That depends on the issuing bank's credit approval. A strong company can have an established trade finance line that does not require full cash collateral. Other applicants may need cash margin, pledged assets or additional guarantees.

Can the exporter receive cash immediately?

The exporter can potentially obtain earlier liquidity through discounting or a structure such as UPAS where suitable bank financing is available. This should be arranged before the exporter relies on early payment.

What happens if the presentation contains discrepancies?

Discrepancies can result in refusal, waiver requests or delays. The beneficiary should therefore review LC terms before shipment and ensure that the required documents can actually be produced in the form demanded by the credit.

Need a Deferred Payment LC or Usance Facility?

If your company needs an import LC with 30 to 180-day payment terms, wants to refinance an existing documentary credit or needs to determine whether an exporter's deferred payment undertaking can be discounted, Financely can review the transaction.

Submit the LC amount, underlying trade, applicant and beneficiary jurisdictions, proposed issuing bank if known, requested tenor, collateral position and expected shipment schedule. We can determine whether the transaction fits our mandate criteria and quote the advisory work required.