Definition of UPAS LC
UPAS LC refers to “Usance Payable at Sight Letter of Credit.” It is the combination of the Usance Letter of Credit and Sight Letter of Credit. Under UPAS LC the bank pays to the exporter on a sight basis, but the importer pays to the bank under the usance term.
The seller can receive payment for goods upon presentation of documents to the buyer’s bank. At the sight LC (Sight Payment Letter of Credit) is an import LC that allows the seller to receive payment from the buyer upon presentation of documents to the buyer’s bank.
Sometimes the seller may not want to deliver the goods through Usance LC though the materials are very urgent for the importer, and the importer may not have surplus funds to pay the LC’s amount. With these circumstances, the importer will consult with their bank regarding the issue of LC and the bank may assure him to pay on behalf of the importer. LC Commission is charged by the issuing bank every quarter and the charge interest against the LC settled amount. Two sources of finance of UPAS LC are discounting the Export Bill and buyers’ credit. Buyer credit is used as a source of finance to settle the LC payment.
The situation of UPAS LC happens when the exporter/beneficiary wants immediate payment for his goods, but the applicant may not have the facility with his bank to issue sight LCs.
Under this Letter of credit, the exporter will get the payment at sight if the documents are credit compliant. The Bank will charge interest, acceptance commission, and other charges 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.
Why UPAS LC financing is required
The buyer always wants to buy on credit on the other hand sellers always prefer to sell in cash. UPAS LC is the perfect solution that could accommodate interests of buyer and seller. As the seller is to be paid at sight, but buyer will pay at a future time, so a financing source should be there to finance the transaction for the period starting from when the seller receive his payment to when buyer will pay for this purchase.
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
For the following reasons an exporter intends to use UPAS LC:
- The exporters will receive money immediately from the discounting bank
- Reduces “Days Sales Outstanding (DSO)” with receipt of payment “at sight”
- 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
UPAS LC is flexible not only for the exporter, but also gives some benefits to the exporter, which are enumerated below:
- The interest rate is comparatively lower than any other finance
- It helps to optimize working capital
- Payment is 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 the costs of other LC are almost similar. The following cost is associated with LC/UPAS LC:
The cost will be paid by the importer:
- LC is issuing Commission
- LC Transmission Charge
- Acceptance Commission
- Reimbursement Charge: As the beneficiary usually claims full payment, reimbursement expenditure will be borne by the applicant (issuing Bank)
- Interest in 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 the 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:
- In the case of the UPAS agreement, the beneficiary will get the benefit of sight, and in the case of Usance LC, the beneficiary will get the benefit after a certain period.
- Both UPAS and Usance LC, the beneficiary enjoy usance facilities.
- In the case of UPAS LC the bank the bank will make payment at sight by creating a loan against Importer but in the case of Usance LC, the payment will be made after a certain period.
- Usance LC is the suppliers’ credit and UPAS LC is the buyers’ credit.
Conclusion
There is no basic difference between the Usance Payable at Sight Letter of Credit and the Traditional usance letter of credit except for the interest charge. In this respect, interest is charged additionally for using UPAS LC fund i.e. LC payment made after a particular period. Under UPAS LC, the extended payment terms of the buyer don’t affect the exporter as the exporter receives payment on time. The buyer pays its issuing bank at the end of the payment term as mentioned in UPAS LC.