What is Usance Letter of Credit?
Usance Letter of credit also known as deferred letter of credit or Time LC or Term LC. When a usance or deferred LC is opened, the payment of this LC shall be made after a predetermined time/ future date upon presentation of the confirming documents.
Usance Letter of credit are opposite to Sight Letter of credit. In case of Sight Letter of credit, the payments will be made to the seller when the confirming documents are presented to the issuing bank. On the other hand, the payment of Usance LC shall be made upon receipt of the documents by issuing bank if the documents are complied with the terms and conditions as mentioned in the original LC. In this respect, the issuing bank accepts the draft and pays on the maturity date as per the terms of the LC.
How does Usance LC work?
After getting the documents, the issuing bank accepts the drafts (if the documents are properly presented and complied as per the terms of LC) and pays on the maturity date as mentioned in the letter of credit. The buyer will get the goods on time but the payments will be at a later date. Usance Letter of credit gives the importer a grace period for the payment of goods. In this respect, the buyer can avail the opportunity to re-sell the goods within this extra time and could be easier for the buyer to make the payment before the maturity date comes.
Usance LC is used when the importer is trustworthy and his credit rating is good to the exporter. Most of the times between a exporter and importer have a close business relationship. Interest to be paid for the deferred period.
The length of the Credit period is varied and the payment dates must be agreed by both parties. The usance tenor is started after BL date or after sight depends on the agreement. Say for example, LC 30 days means LC payment o be made after 30 days of BL date and If the BL date is 1st April, the payment due date will be 1st May. When “days after sight” term is used, it means the calculation of of usance starts from the date of receipt of documents by the issuing bank.
Setting a calculable and undisputed payment date is very important. A collateral from the buyer may be needed to ensure the payment of the goods. Seller would feel comfort if the payment is guaranteed by collateral or any other way. However, the exporter may ask his bank for discounting the Usance LC in order to receive the payment before the deferral period is over.
Charges of Usance LC
The Usance LC charges is similar to other LC charges except for acceptance commission for the deferred payment. The charges for opening a letter of credit is levied by the issuing bank and payable by the applicant (importer). The common charges and commission are LC Opening commission, Negotiation/Payment commission, SWIFT Charges, Amendment fees, discrepancies fees, delivery order fee, courier fee and outstanding query fess. Following table shows some common LC Charges:
|Opening Commission||Charged by issuing bank at the time of opening LC and the rate would be 0.125% on the total LC value. This charge is applicable from the date of issuing of LC to the date of LC expiry. Opening Commission is charged only for single time.|
|Negotiation/Payment Commission||This is charged for handling each presentation of documents under the LC. After getting the documents the bank checking all the documents and details in accordance with LC terms. This rate would be 0.125% on the invoice value of the shipment.|
|SWIFT Charges||SWIFT message issued by the financial institution to send message to each other on the SWIFT Network (Society for Worldwide Inter bank Financial Telecommunication). This is charged to send LC electronically to the Beneficiary’s bank. SWIFT charges normally charged by the issuing bank.|
|Amendment fee||Amendment fee is charged by the issuing bank if any change is made with the requested of applicant. Remember that any change made in the LC must be supported by the beneficiary.|
|Discrepancy Fee||This is charged by the issuing bank when they receive documents for negotiation and found that the documents are not complied with the terms of LC condition. The fee is usually a flat amount. In addition of discrepancy charge, a swift charge also apply to notify the beneficiary about the non-compliance. Issuing bank will notify to the beneficiary’s bank regarding the charge and discrepancy. All discrepancy is charged to the beneficiary and adjusted with the LC payment.|
|Acceptance Commission||Acceptance commission is charged for Usance/Deffered LC only. Acceptance commission is charged on quarterly @0.125%.|
Tenor of Usance LC
A Usance payment LC provides the importer a deferred payment option. The tenor of payment is pre-determined by the buyer and seller and can be classified into two based on their tenor. The usual tenors can be as follows:
Payment within 90 days after the Bill Of Lading (B/L): This term indicates that after BL issued, the buyer has a time of 90 days from the date of B/L to make the payment for the goods.
Payment within 30 days after sight: This terms represents that after receiving the documents from the bank, the buyer will get 30 days for making the payment of the goods.