Usance Letter of Credit – What you should know on it
Usance letter of credit has been given different names like Time LC, deferred letter of credit or Term LC. As you open a usance LC or a deferred LC, it means that the payment will be done after a pre-set time on a future date on confirming the documents. A usance letter of credit is just the opposite of Sight letter of credit. In case of a sight letter of credit, the payments are made to the seller only when the seller confirms the documents which are presented to the issuing bank.
On the contrary, the payments of Usance LC are done on the receipt of documents that are issued by the issuing bank and it is also checked whether or not the documents abide by the predetermined terms and conditions that are mentioned in the original LC. The bank accepts the draft and pays on the maturity date according to the LC terms.
Understanding usance letters of credit
A deferred letter of credit or a usance letter of credit is a typical term that is used in trade finance. But before you move on to understand usance letter of credit, you should first understand what a letter of credit is and why it is used. As long as international trade is concerned, there is enough lack of trust in such transactions and hence the mechanisms like letters of credit are utilized to reduce the risk. Letters of credit have different types like usance LC, site LCs and Standby LC.
Letters of credit are utilised to facilitate trade between the sellers and buyers of goods all over the world. For aggravating trade, the letters of credit are kept at the right place by the seller and buyer. When the bank issues such LCs, it allows both the parties to trade in peace. Only after certain conditions are fulfilled, goods can be released and it is thereafter that the payment can be made by the purchasing bank. While taking a look at the various kinds of instruments, the factor of when a payment is done is of highest importance.
Advantages of usance letter of credit for the seller
 The seller gets the obligation of the bank of the buyer to pay for the shipped goods
 Reduces the risk of production if the buyer changes or cancels his order
 The seller can know the exact date of payment for the goods
 The opportunity to receive financing during the period between shipment of goods and receiving the payment
 The buyer can’t refuse to pay due to any unnecessary complaints about the goods


Advantages of usance letter of credit for the buyer
 The bank will pay off the seller for the goods and services provided the latter shows the determined documents associated with the letter of credit
 The buyer demonstrates his solvency through a letter of credit
 The buyer controls the time period that is required for shipping of goods
 For issuing a usance letter of credit for delayed payment, the seller grants credit to the buyer
 Having a letter of credit lets the buyer to avert or reduce pre-payment

Usance letter of credit – How is it different?
Another name of usance letter of credit is deferred letter of credit or term LC. As the name suggests, a letter of credit is payable at a future provided the conditions in the letters of credit are fulfilled and all the documents are presented.
If you have to understand usance letter of credit, you can compare it to Sight letter of credit where the funds are instantly transferred to the supplier as soon as the documents are given. In cases where usance LC is used, you’ll find a receipt of the documents by the issuing bank and where these abide by the terms of the LC, the issuing bank receives the draft and transmits funds for payments agreeing upon a future maturity date. The buyer is offered a form of credit terms as the buying party will take the documents of the product bought and also enjoy the ability to pay at a future date.
Usance letters of credit – Know the types
Letters of credit are instruments of payment that are leveraged for improving transactions of international trade. The main purpose of letters of credit is that it mitigates the risk that is linked with international trade for the seller and the buyer. As with any other financial mechanism, letters of credit even have various secondary purposes. There are multiple types of letters of credit that serve different purposes and one such kind is usance letter of credit.
A usance letter of credit offers deferred option for payment to the buyer and the tenure of payment is decided by the seller and the buyer. Similarly, the usance letter of credit can be categorized in 2 types based on the tenors:
 Payment within 90 days post the B/L or the Bill of Lading
Here, after the B/L is issued, the buyer is given a time of 90 days from the date of B/L to pay for the goods.
What is The Bill of Lading?
A bill of Lading is a document between the carrier (transporter) and the shipper of goods, that confirms the receipt of goods to be transported. It contains the details regarding the consignor’s name, consignee’s name, the date when the goods have been loaded, account numbers used to track the orders etc.
 Payment within 30 days post sight
In this case, the date on which the issuing bank obtains the documents, from that date, the buyer will be given 30 days or a month to pay for goods.
Usance letter of Credit – Why and when is it used
A usance letter of credit is used for the same reason for which credit terms are offered. The purchaser is allowed more flexibility, increased working capital and the option of selling stock before payment. Goods payment is easier at a later date as against paying on receipt.
The financial instrument called usance letter of credit can be used only when there is a trust element between both the selling and buying parties. You need to have a clear understanding of the amount to be paid and the interest rate of the product. It is through the Letter of Credit that you can set out the actual payment date and time to maturity so that both the parties can take this as a reference.
So, it can be safely concluded by saying that a usance letter of credit is used when the buyer receives an upper hand on the seller and when it is clearly a buyer’s market. This is why the seller agrees to abide by the lenient terms of a usance LC.
Usance Letter of credit – Why is it used?
The same reason for which credit terms are offered, a usance letter of credit is also offered for the same reason. The purchaser is given flexibility, better flow of working capital and availability to sell stocks before payment. In this case, payment for goods is easier when done on a later date as compared to payment on receipt as there would have been an element of payment collection from the actual purchaser.
Usance Letter of credit – When can it be used?
This usance letter of credit can be used only when there is a trust factor between the selling and buying parties. It is vital to understand the future amount that is to be paid and the interest rate that has been decided on the product. The usance letter of credit will set the maturity time and the date of payment so that both the parties can utilize that as a reference. The tenor is set as being specific few days following the BL date. When you have a usance letter of credit, the purchaser deploys funds into different areas of the business till the payment is done.
Thanks to the usance letters of credit that the seller is able to trade in peace as the payment is guaranteed by promises within the banking system.