A sight LC causes payment to be made immediately to the beneficiary/seller/exporter upon presentation of the correct documents.
A time or date LC specifies when payment is to be made at a future date and upon presentation of the required documents.
Alternative term for deferred payment letter of credit.
What is 'Usance'
1. The allowable period of time, permitted by custom, between the date of bill and its payment. The usance of a bill varies between countries, often ranging from two weeks to two months.
2. The interest charged on borrowed funds. Usance is derived from the action of usury.
3. The use of goods for economic purposes.
also known as Deferred Payment Letter of Credit or Time LC or Term LC is a letter of credit payable at a predetermined time / future date after the conforming documents are presented. In the case of a Sight letter of credit, the payment to the seller is made when the conforming documents are submitted.
In the case of Usance LC, upon the receipt of documents by issuing bank if the documents are appropriate and comply with the terms of the LC, the issuing bank accepts the draft and pays on the maturity date as per the terms of the LC. This way the buyer receives the goods immediately but pays back the bank at a later date. In other words, this letter of credit gives the buyer a grace period for payment. With the extra time, the buyer will receive the goods in his country and will be able to resell them or process &sell the goods.
Most of the time, Usance LC is preferred where a buyer and a seller have a close business relationship.
The parties must agree on the interest rate on the unit price or the amount to be paid by the buyer. The maturity is indicated with a certain number of days and the length of the credit period and the payment dates must be agreed by both parties.
The usance tenor is expressed as X days after BL date or X days after sight.
For instance, LC 30 days means LC is payable 30 days after BL and if the BL date is 1 June, the payment due date will be 1 July.
When "X days after sight" term is used, it means the calculation of usance tenor starts from the date of receipt of documents by the issuing bank. The important thing is to set a calculable and undisputable payment date. The buyer will have its credit/collateral/cash tied up until the payment is made.
For the seller, the payment is guaranteed as if it were made at sight / immediately because the issuing bank assures the advising bank that the resources to cover the payment are available and set aside for the LC.
The exporter may ask his bank to discount the Usance LC in order to receive the payment before the deferral period is over.