Sight vs. Usance Letters of Credit for Beginners
Understanding the Clock: Sight vs. Usance Letters of Credit for Beginners
Did you know that the exact phrasing of your payment method in international trade determines whether you get paid today or three months from now?
This guide demystifies the essential difference between Sight and Usance LCs. You'll learn the four primary ways a bank promises to pay, helping you choose the best payment structure for your global deals.
Your Roadmap
1. The Foundation: Availability and Tenor
Every Letter of Credit (LC) must define when and how payment will occur. The timing is the tenor (maturity date), and the method is the availability.
Under international UCP 600 rules, an LC must state it is available by one of four methods:
- Sight Payment (Immediate)
- Deferred Payment (Delayed)
- Acceptance (Delayed, involves a draft)
- Negotiation (Bank advances funds)
2. Sight Payment (Payment Now): The Speed of Cash
A Sight LC promises immediate payment upon presentation of compliant documents. Payment is made "at sight," meaning right after the bank confirms the documents are correct (within a max of 5 banking days).
Key Advantage for the Seller:
The seller receives payment without deduction of interest. This payment is considered "honour" and is without recourse. Once the bank pays, it cannot ask for the money back if the buyer defaults (assuming documents were compliant).
3. Usance, Acceptance, & Deferred Payment (Payment Later)
Usance (or "time") credits provide a period of credit to the buyer, delaying the actual payment until a future maturity date (e.g., "90 days after sight").
- Deferred Payment: The bank gives a "deferred payment undertaking" and pays the seller on a specific future date. This is the modern preference.
- Acceptance: Requires the seller to present a time draft (bill of exchange). The bank "accepts" this draft, signing a formal promise to pay it at maturity.
4. The Negotiation Alternative: Recourse and Interest
Negotiation is when a nominated bank (the seller's bank) "purchases" the documents and the right to payment, advancing funds to the seller.
Key Differences from Sight Payment:
If the seller wants immediate funds under a negotiation credit, the bank will advance the money BUT:
- Interest is deducted for the time the bank has to wait to be reimbursed.
- Payment is usually with recourse (if the LC isn't confirmed). This means the bank *can* claw back the funds from the seller if the issuing bank refuses to pay.
5. The Exporter's Choice: Balancing Speed vs. Buyer's Credit
The core trade-off is simple: Does the seller want immediate cash, or can they (or the bank) provide credit to the buyer?
Sight Payment (Payment Now)
- Payment Timing: Immediate
- Trade Credit: None (Seller gets cash)
- Interest: Typically none deducted
- Recourse: Payment is without recourse
Usance / Deferred (Payment Later)
- Payment Timing: Delayed (at maturity)
- Trade Credit: Yes (Buyer gets time)
- Interest: None, unless seller "discounts" (sells) the future payment
- Recourse: Payment at maturity is without recourse
Frequently Asked Questions
What's the main timing difference between a Sight LC and a Deferred Payment LC?
A Sight LC is fulfilled by immediate payment "at sight." A Deferred Payment LC is fulfilled by the bank making a promise to pay at a *future maturity date*.
If a seller wants the quickest payment with no deductions, what should they ask for?
The seller should request the documentary credit to be available "by payment" (sight payment). This settlement is generally without deduction of interest and without recourse.
What's the catch when a bank "negotiates" and pays a seller immediately?
The immediate payment will typically be made with a deduction of interest until the date the nominated bank expects to be reimbursed. It may also be with recourse if the LC isn't confirmed.
What special document is needed for an "Acceptance" LC?
A time draft (or bill of exchange). Drafts are no longer mandatory for LCs *unless* the credit is available by acceptance.
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