Types of Usance Letters of Credit and How They Work
Financely's guide to deferred payment, acceptance, negotiation, UPAS, confirmed and transferable usance letters of credit and how each structure works.
A Practical Guide to Usance Letters of Credit
A usance letter of credit allows an importer to buy now and settle later while giving the exporter a bank-supported payment undertaking. The commercial objective is simple. The banking structures used to achieve it are not.
Importers frequently need time between receiving goods and generating the cash required to pay for them.
An importer may buy inventory, clear customs, distribute the goods and collect from customers over a period of 60 or 90 days.
The overseas supplier may not want to provide unsecured open-account credit for that period.
A usance letter of credit can bridge that difference.
Instead of requiring immediate payment after a complying documentary presentation, the letter of credit establishes a future payment maturity backed by the issuing bank's undertaking.
Structuring an Import Letter of Credit
Financely works with eligible importers and traders on documentary credit structuring, issuing-bank requirements, UPAS structures, LC facilities and post-shipment financing.
Request a QuoteWhat Is a Usance Letter of Credit
Usance is a commercial term used for a documentary credit where payment becomes due at a future determinable date rather than immediately after a complying presentation.
The future maturity might be 30, 60, 90, 120 or 180 days after an agreed reference date. Longer tenors can also be used where banks and counterparties accept them.
The most important point is that usance does not describe only one banking mechanism.
UCP 600 requires a documentary credit to state whether it is available by sight payment, deferred payment, acceptance or negotiation.
In practice, a usance transaction can be structured through deferred payment, acceptance or a tenor-based negotiation structure. Additional features such as confirmation, transferability or sight financing can then be added.
ICC guidance on documentary credit terminology provides the underlying UCP framework.
Sight LC Versus Usance LC
| Feature | Sight LC | Usance LC |
|---|---|---|
| Payment | Due following complying presentation and examination | Due at an agreed future maturity |
| Buyer Credit Period | Limited | Extended |
| Exporter Cash Flow | Earlier | Delayed unless financed or discounted |
| Discounting | Usually less relevant | Frequently important |
Deferred Payment Usance LC
A deferred payment LC is one of the cleanest forms of usance credit.
The exporter ships the goods and presents the documents required by the credit.
If the presentation complies, the relevant bank incurs a deferred payment undertaking. Payment is then made at the maturity specified in the LC.
No bill of exchange is necessarily required.
A steel importer opens an irrevocable documentary credit for USD 4 million payable 90 days after the bill-of-lading date. The exporter ships the steel and makes a complying presentation. The bank's payment obligation becomes due at the calculated 90-day maturity rather than immediately.
Economically, the buyer has received approximately three months of trade credit while the seller has replaced part of the buyer's direct payment risk with a bank undertaking.
Acceptance Usance LC
An acceptance LC also provides payment at a future date but traditionally uses a time draft or bill of exchange.
The beneficiary draws the draft according to the LC terms. The relevant bank accepts that draft after a complying presentation and becomes obligated to pay it at maturity.
The accepted draft can become a financeable receivable.
Acceptance structures remain commercially relevant, although many transactions can achieve a similar deferred-payment objective without requiring a physical draft.
Deferred payment creates a future payment undertaking without necessarily requiring a draft. Acceptance traditionally involves the bank accepting a time draft and paying that accepted draft at maturity.
Negotiation Usance LC
Negotiation has a specific meaning in documentary credit practice.
Under UCP 600, negotiation involves the nominated bank purchasing drafts or documents under a complying presentation by advancing or agreeing to advance funds before reimbursement is due to that bank.
A credit available by negotiation can therefore create an important financing opportunity for the exporter.
The LC may have a future maturity while the negotiating bank provides cash to the beneficiary before that date.
Exporters should not treat payment, negotiation and discounting as interchangeable words. They describe different banking actions even though each can ultimately result in earlier access to cash.
UPAS Letter of Credit
UPAS commonly refers to Usance Payable at Sight.
It addresses one of the most common commercial disagreements in international trade.
The exporter wants prompt payment.
The importer wants 60, 90 or 180 days to pay.
A UPAS structure can accommodate both objectives through bank financing.
The exporter presents complying documents and receives payment on a sight basis from the financing or nominated bank according to the agreed structure.
The importer remains responsible for settlement at the future usance maturity.
Financely maintains a dedicated guide to UPAS letters of credit .
The supplier can price the sale on the basis of receiving cash promptly while the importer retains a deferred repayment period. The difference is funded by a bank or financing institution rather than directly by the exporter.
Usance LC Negotiable at Sight
Another structure encountered in international banking is a usance LC that allows the beneficiary to obtain sight financing through a nominated or reimbursing bank.
The commercial result resembles UPAS.
The exporter can receive cash earlier while the importer retains the agreed usance period.
Bank of China describes this type of product as an usance LC negotiable at sight and uses arrangements under which the beneficiary can request sight payment while the importer's underlying obligation remains deferred.
Confirmed Usance LC
Confirmation does not create a separate payment-tenor category.
It changes which banks provide an undertaking to the beneficiary.
The issuing bank provides the original undertaking. A confirming bank adds its own undertaking to honour or negotiate a complying presentation according to the terms of the confirmed credit.
Confirmation can be particularly valuable when an exporter is comfortable with the commercial buyer but has limited appetite for the issuing bank or its country.
A confirmed usance LC can also be more attractive for discounting because the financing bank may be able to rely on the credit quality of the confirming bank.
Financely provides a separate guide to letter of credit confirmation .
Transferable Usance LC
Transferability is another feature that can be combined with usance payment terms.
A transferable credit allows the first beneficiary to request that the credit be made available in whole or in part to a second beneficiary where the LC expressly states that it is transferable.
This can be useful for trading companies and intermediaries that have a customer LC but rely on another company to supply the goods.
The transferred credit can retain usance terms subject to the permitted changes and the original LC structure.
Back to Back Usance LC
A back-to-back arrangement uses two separate documentary credits.
The trader receives one LC from its buyer and asks its bank to issue a second LC in favour of the underlying supplier.
Either credit can contain sight or usance payment terms depending on the structure approved by the banks.
The timing between the master credit and the second credit is critical. A trader that must pay its supplier before receiving proceeds under the master LC can create a financing gap even though both sides of the trade are supported by documentary credits.
Revolving Usance LC
Importers with repeated purchases may prefer a revolving LC facility rather than opening an entirely new transaction structure for every shipment.
The approved LC capacity can reinstate or remain available according to the facility terms after previous utilizations are settled.
Individual drawings can still carry usance maturities.
This structure can be useful for recurring commodity purchases, raw-material procurement, inventory replenishment and established supplier programs.
Review Financely's revolving letter of credit facilities for repeat trade flows.
How the Usance Period Is Calculated
The tenor is only useful when the maturity formula is clear.
Common structures can calculate maturity from different reference events.
The exact wording matters because changing the reference date can materially change the effective credit period.
Discounting a Usance Letter of Credit
An exporter does not necessarily have to wait until maturity to receive cash.
A financing institution may be willing to advance funds against an eligible deferred bank payment undertaking or accepted draft.
The financier evaluates the issuing bank, confirming bank where applicable, transaction documents, tenor, currency, country risk and whether the bank undertaking has been properly established.
The exporter receives the discounted amount before maturity. The financier then receives the face amount when the bank obligation becomes payable.
Forfaiting Under a Usance LC
Forfaiting can provide non-recourse financing against certain bank-supported future receivables.
Bank of China describes usance LC forfaiting as the purchase of outstanding receivables supported by an issuing-bank undertaking under negotiation, acceptance or deferred-payment credits.
The availability of non-recourse treatment depends on the financing provider being willing to assume the relevant bank and country exposure.
Who Pays the Financing Cost
The commercial parties should agree who bears the cost of extending the payment period.
In a conventional deferred-payment sale, the exporter might build financing cost into the sale price.
Under a discounting structure, the exporter can bear the discount cost in exchange for receiving cash early.
Under many UPAS arrangements, the financing cost is commercially allocated to the importer because the importer is receiving the extended credit period.
There is no substitute for stating the agreed allocation clearly in the sale contract and LC application.
Which Usance Structure Should an Importer Use
| Commercial Requirement | Structure to Consider |
|---|---|
| Buyer needs time and supplier accepts future payment | Deferred Payment Usance LC |
| Transaction requires an accepted time draft | Acceptance LC |
| Exporter wants early cash against usance documents | Negotiation or Discounting |
| Supplier insists on sight cash while buyer needs time | UPAS LC |
| Exporter needs stronger bank risk | Confirmed Usance LC |
| Trader needs to pass LC value to underlying supplier | Transferable or Back to Back Usance LC |
| Importer has recurring purchases | Revolving Usance LC Facility |
Common Usance LC Mistakes
- Using the word usance without defining the maturity formula
- Assuming the exporter will automatically discount the credit
- Opening a deferred LC when the supplier contract requires sight payment
- Failing to agree who bears discount or financing costs
- Ignoring issuing-bank and country risk
- Assuming confirmation will automatically be available
- Creating documentary conditions the exporter cannot satisfy
- Using a tenor longer than the underlying trade cycle requires
- Failing to align shipment dates with payment maturity
- Confusing the LC payment undertaking with the buyer's separate reimbursement obligation to its bank
The LC Should Follow the Trade Cycle
A 180-day usance period is not automatically better than 90 days.
The appropriate tenor should reflect how long the importer actually needs to convert the financed goods into cash.
Consider an importer that receives goods 30 days after shipment, clears and distributes them within another 15 days and collects customer receivables 45 days later.
The working-capital cycle is roughly 90 days from shipment.
A 90 or 120-day structure may therefore be commercially more sensible than paying for an unnecessarily long 180-day facility.
Bank Approval Still Matters
A sales contract cannot force a bank to issue a usance LC.
The importer needs an issuing bank willing to establish the documentary credit and approve the resulting contingent or funded exposure.
The bank can assess the applicant's financial statements, transaction history, collateral, cash margin, goods, supplier, buyer, tenor, countries and repayment source.
The appropriate structure can therefore depend as much on the importer's available banking facilities as on the commercial agreement with the supplier.
How Financely Approaches Usance LC Transactions
Financely begins with the underlying commercial transaction rather than selecting an LC type first.
We review the purchase contract, supplier payment requirement, shipment cycle, expected resale period, buyer collections, requested tenor and available applicant credit support.
The transaction can then be structured around sight, usance, deferred payment, acceptance, UPAS or another bank-approved documentary credit mechanism.
Where the client has recurring purchases, the analysis can extend to a revolving LC line rather than structuring one issuance at a time.
Financely's current MT700 documentary credit advisory covers transaction review, instrument structuring and financing support for eligible commercial trades.
Request Usance LC Advisory
Submit the LC amount, supplier, buyer, goods, countries, requested tenor, payment requirements, available collateral or banking facility and underlying commercial contract. Financely will assess the transaction and provide a paid advisory proposal where the mandate falls within scope.
Request a QuoteFrequently Asked Questions
What does usance mean in a letter of credit
Usance generally means that payment is due at a future determinable maturity rather than immediately after a complying documentary presentation.
What are the main types of usance LC
Core structures include deferred payment credits, acceptance credits and usance credits available by negotiation. Commercial variants can also include UPAS, confirmed usance, transferable usance, back-to-back and revolving structures.
Can the exporter receive payment before the usance maturity
Potentially. A bank or financing institution may negotiate, prepay or discount an eligible future bank payment undertaking depending on the LC terms, issuing-bank risk, tenor and financing arrangement.
What is the difference between UPAS and a normal usance LC
Under a conventional usance LC the exporter may wait until maturity unless the receivable is separately financed. Under a UPAS structure the exporter can receive sight payment while the importer retains the agreed deferred repayment period.
Is a 90-day LC always calculated from shipment
No. The LC must establish the relevant maturity formula. The tenor can potentially be calculated from a bill-of-lading date, sight event, acceptance date or another defined reference point.
Can a usance LC be confirmed
Yes. A confirming bank can add its own undertaking where it is willing and authorized to do so. Confirmation can mitigate defined issuing-bank and country risks for the beneficiary.
Does Financely issue usance letters of credit
No. Financely provides advisory, structuring and financing coordination. Any documentary credit is issued by the relevant bank or financial institution subject to its independent underwriting and approval.
Important. This material is provided for general commercial and educational purposes only and does not constitute legal, banking, tax or regulatory advice. Documentary credit transactions should be reviewed against the operative LC wording, the underlying commercial agreement, applicable law, UCP 600 where incorporated and relevant international standard banking practice. Financely provides trade finance advisory, transaction structuring and financing coordination. Financely is not a bank, direct lender, deposit-taking institution or guarantor and does not itself issue letters of credit. Issuance, confirmation, negotiation, discounting, financing and settlement remain subject to the independent underwriting, compliance requirements, credit approval and operational procedures of the relevant financial institutions.
