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Usance (Term) Letters of Credit

A Usance Letter of Credit, also called a Term LC, allows payment at a future date after the presentation of compliant documents. The payment is made at the end of a set credit period known as the usance period or maturity date.

Purpose

Usance credits help buyers manage cash flow by giving them time to pay after shipment. Sellers gain assurance of future payment from the issuing or confirming bank once documents comply.

This structure is common in trade where goods take time to transport or where buyers need time to sell goods before making payment.

How It Works
  1. The buyer arranges a usance LC with their bank.
  2. The exporter ships the goods and presents the required documents to the nominated or confirming bank.
  3. The bank checks the documents for compliance under UCP 600.
  4. Once approved, the bank accepts the documents and commits to pay on the agreed maturity date (for example, 60 or 90 days after the bill of lading date).

The exporter can choose to wait until the maturity date for payment or receive early funds through discounting or negotiation with their bank.

Types of Usance Credits
  1. Acceptance Credits
    The LC requires a bill of exchange (draft). The bank “accepts” the draft and agrees to pay on maturity. The exporter may discount the accepted draft to receive early payment.
  2. Deferred Payment Credits
    The LC does not require a bill of exchange. The bank simply undertakes to pay the exporter on the agreed future date once the documents are compliant.

Both types provide the same result: payment after a defined period.

Example

A buyer in France purchases electronics from a supplier in Malaysia under a 90-day usance LC. The supplier ships the goods and presents the documents to its bank. The documents are found compliant. The bank confirms payment is due 90 days after the bill of lading date. The supplier can wait for payment or request early discounting.

Benefits

For the exporter:

  • Assurance of payment from a bank even though payment is delayed.
  • Option to discount or negotiate the LC for immediate cash.
  • Strong protection compared to open account terms.

For the importer:

  • More time to pay after receiving the goods.
  • Improved working capital and liquidity management.
  • Predictable payment schedule linked to trade cycle.
Risks

For the exporter:

  • Longer payment period increases exposure to bank or country risk.
  • Discounting may involve additional cost.

For the importer:

  • Bank charges for deferred payment facilities.
  • Liability remains until full payment on the maturity date.
Best Practice
  • Confirm the usance period and maturity calculation method in the LC.
  • Verify whether interest or discount charges are for the buyer or seller.
  • Present documents quickly to start the maturity countdown.
  • Track the maturity date and ensure payment is made on time.
Relationship to UCP 600

Under UCP 600 Articles 7, 8, and 12, the issuing and confirming banks are obligated to honour payment on the maturity date of a compliant usance LC. The bank’s commitment is binding once the documents comply, even if the buyer later faces financial difficulties.

Summary

A Usance Letter of Credit defers payment to a future date while keeping the bank’s payment guarantee in place. It supports trade where buyers need extended credit and sellers want secure payment assurance. The structure balances liquidity and risk for both sides of a trade.