What is a Usance Letter of Credit (LC)?

A Usance Letter of Credit (Usance LC) is one of the Irrevocable Letter of Credit in which the payment is made at a future date after the buyer has received the documents and the goods. The payment is commonly used due accordingly in a certain period of time, which can range from 30 to 180 days, depending on the agreed terms & conditions.

Main Characteristics of an Usance LC:

1. Deferred Payment: The payment is not made early upon submission of documents, as with a at Sight LC. Instead, the payment is deferred to a future date, which can be a specified number of days after the shipping date, after the submission of the documents, or after a specific time.
2. Documentary Compliance: It is similar to other types of LCs, that the payment in a Usance LC is made when the seller submits all the required documents that fulfill the terms & conditions of the LC.
3. Risk and Cash Flow Management for Buyer: The buyer gets benefits from having extra time usually 30, 60, or 90 days to pay for the goods after receiving the goods. This allows the buyer to sell the goods or use them before having to pay the bank.
4. Security for Seller: While the payment is deferred, then the seller has the security of knowing that the payment will be made on the due date or a certain time, provided the documents are in order. The seller’s risk is decreased compared to an open account or other less secure payment methods.
5. Common in Trade: The Usance LCs are usually used in international & global business, especially when the buyer needs more time to pay after receiving the goods or services.

Comparison with Sight LC:

• Sight LC: The payment is made instantly when the documents are submitted.
• Usance LC: The payment is made after a specific period of time e.g., 30, 60, 90 days after the documents are submitted and giving the buyer more flexibility in terms of cash flow.

When to Use:

• Buyers Who Need Credit: The Usance LCs are usually used when the buyers need the credit terms to pay for goods after receipt, which is helpful in managing the cash flows.
• Trade Relationships: Common in every situation where a trust-based relationship exists between the buyer and the seller, and the buyer has the ability to pay within the agreed period of time.
• International Transactions: Frequently used in international business, especially when the buyer wants to ensure that the goods are delivered before making the full payment.