What is Usance?

1671 reads · Last updated: December 5, 2024

Usance is a type of letter of credit used in international trade, which allows the buyer to make the payment within a certain period after receiving the goods. Unlike a sight letter of credit, a usance letter of credit grants the buyer a specific period (usually 30 days, 60 days, 90 days, or longer) to make the payment.

Definition

Forward payment is a method of payment in international trade where the buyer pays within a certain period after receiving the goods, using a letter of credit. Unlike a sight letter of credit, a forward letter of credit allows the buyer to pay within a specified period (usually 30, 60, 90 days, or longer).

Origin

The concept of forward payment originated from the need in international trade to provide greater flexibility and security for both buyers and sellers. As global trade expanded, forward payment became a common payment method, helping businesses manage cash flow and credit risk.

Categories and Features

Forward payment mainly includes two types: Documents against Acceptance (D/A) and Usance Letter of Credit (Usance L/C). D/A requires the buyer to pay within a certain period after accepting the bill of exchange, while Usance L/C is guaranteed by a bank, ensuring the seller receives payment within the agreed period. Key features of forward payment include delayed payment, reduced financial pressure on the buyer, and increased credit risk for the seller.

Case Studies

Case 1: A Chinese exporter sells electronic products to a US importer, agreeing to use a forward letter of credit with a 60-day payment term. The exporter receives confirmation from the bank immediately after shipment, ensuring payment in 60 days. Case 2: A German machinery manufacturer sells equipment to an Indian buyer using the Documents against Acceptance method, with the buyer paying within 90 days after receiving the equipment. This arrangement helps the buyer generate sufficient cash flow from selling the equipment to pay for it.

Common Issues

Investors using forward payment may encounter issues such as increased credit risk from the buyer, leading to payment delays or defaults; exchange rate fluctuations may affect the final payment amount. To mitigate risks, sellers can request bank guarantees or use hedging tools.

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