Usance Letter Of Credit - Definition And How Does It Differ From Sight Letter Of Credit?

What is a Usance Letter Of Credit?

A Usance Letter Of Credit is a particular type of letter of credit where the buyer gets a predetermined credit period ie. These Usance letters of credit are payable within a predetermined time only after the presentation of the confirming documents. These are also known as Time LC or Deferred Payment LC.

How Is The Usance Letter Of Credit Different?

As we know that letters of credit are one of the most effective trade finance instruments used to facilitate international trade transactions by reducing the payment risks associated with global trade for both the buyers and sellers. However, there are many types of Letter of credit each of which has a different purpose for either importer or exporter and Usance LC is one of them.

The prominent feature that makes a usance or deferred letter of credit different from other types of LCs is its deferred payment option to the buyer. In other words, the period of the payment is pre-decided by the buyer and seller. The easiest way to understand a usance LC is to compare it with a sight LC. Keep reading to know.

Types of Usance LC

The Usance LC can be classified into two categories which are as follows:

1. Payment Within 90 Days After The Bill Of Lading- In this type of Usance LC, the buyer gets the opportunity to pay the seller after 90 days from the date of issue of a bill of lading. It means the buyer has a predetermined time of 90 days to pay the seller for the shipped goods.
   
   
2. Payment Within 30 Days After Sight - This type of Usance LC allows the buyer to pay the seller within 30 days from the date of receiving the documents by the issuing bank.
   
   
   

Recommended read: Letter of Credit Guide

Usance LC V/s Sight LC

If you are getting confused between the Usance letter of credit and sight letter of credit, then let us tell you that they both are completely different from each other.

• In case of Usance LC, the buyer gets the deferred payment option while in the sight LC, the buyer is bound to make the payment to the seller immediately after receiving the documents.
  
  
• Insight LC, the funds are transferred to the sellers upon the submission of the confirming documents while Usance LC involves a receipt of documents by the issuing bank. After verifying the terms of the documents, the issuing bank considers the draft and releases the payment in compliance with LC at a pre-described date.

Why Is A Usance LC Used?

The most favorable part that makes a usance letter of credit a more preferable choice among importers is the benefit of a predetermined credit period and a deferred payment option which any buyer does not have in other letters of credit. It means that the buyer does not need to pay the seller on the spot due to the extended credit period. It can work as interest-free working capital for the buyer and allows the buyers to manage their day to day business expenses. Also, a more important aspect to consider is that the buyer receives the goods even before he pays for them which provides extra time to get ensured with the quality of the shipped goods. It facilitates buyers with flexibility, and increased working capital benefits.