Usance letter of credit |
Posted: February 17, 2020 |
Usance letter of credit is also referred to as deferred payment letter of credit. Under this payment method, payment is undertaken by the issuing bank, i.e, the buyer’s bank on a certain fixed date that is determined prior to entering the contract. The payment is done by the bank on a predetermined or a future date decided in advance. This payment is also subject to the presentation of required documents and fulfilment of the terms and conditions mentioned in the letter of credit. Usance letter of credit is a form of credit borne by the buyer towards the seller. Though there is no risk of non-payment as the bank guarantees the payment to the seller but the buyer stands at an advantageous position wherein he can proceed to pay after getting the delivery and inspecting it thoroughly. How this works? Using a usance letter of credit gives the purchaser an opportunity to utilize the funds towards other areas of the business till the time payment is made. The seller is at comfort through this option because of the presence of the promise by the issuing bank to pay at a later date. While dealing in the letter of credit, one thing that is of utmost importance ,that is, to make sure of the credit worth of the bank or the financial institution involved. Making sure that the issuing bank has enough funds to fulfil the payment at the time of maturity is crucial for the seller. The seller, in case, wishes to be paid in advance, can also do so by discounting the letter of credit at a date before maturity. There can be two types of usance letter of credit based on the tenure for payment. 1. Payment within 90 days after the Bill of Lading is passed- What is The Bill of Lading? 2. Payment within 30 days after sight- Usance letter of credit allows an option of bearing credit by the buyer as opposed to letter of sight which demands the buyer to make the payment immediately after the presentation of the documents.
|
||||||||||||||||||
|