Letter of credit (usance, acceptance, deferred payment)
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A bank promises to pay the exporter on a set later date, once the exporter hands in documents that match the letter of credit.
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01 · In plain words
The buyer's bank promises to pay you on a set later date once your documents match the letter of credit
A is a promise from a bank. The importer's bank promises the exporter that it will pay, as long as the exporter meets the terms written in the letter of credit, or LC (US International Trade Administration).
A pays later. "Usance" means the time allowed before payment. The bank checks your documents. If they match the LC, the bank promises to pay you on a fixed future date, the date (ICC Academy).
The LC says which of two ways it pays later (ICC Academy):
- Deferred payment. The bank gives a written promise to pay at maturity, called a .
- Acceptance. The exporter hands in a , a written order to pay at a future date. The bank signs it to show it agrees to pay. That signature is the .
Either way, the bank pays on the maturity date. The importer can get the documents, and so the goods, before it pays. The bank looks only at the papers. It must pay if the documents match (US ITA).
Who is involved
- The importer, called the , asks its bank for the LC.
- The exporter, called the , receives the LC and gets paid.
- The importer's bank, the , makes the promise to pay.
- The passes the LC on to the exporter, at the issuing bank's request.
- The is the bank named in the LC to take the documents. It may give the deferred payment promise or accept the draft, when the LC allows it.
- Sometimes a adds its own promise. See Confirmed letter of credit.
02 · How it works
Eight steps take the deal from a sale with a later payment date to payment at maturity
Figure 1 · Interactive
A usance letter of credit, step by step
Read down the steps. The importer gets the goods at step 7 and pays at step 8.
Source: ICC Academy on deferred payment, acceptance and the banks' roles; UK Supreme Court, Taurus v SOMO, October 25, 2017, for the 30-day example.
03 · What it means for you
The exporter waits for a bank-backed payment date, and the importer gets the goods before it pays
Figure 2 · Interactive
What a usance LC means for each side
Choose your side of the trade.
04 · Worked example
On a $1 million LC with 90 days to pay, illustrative costs add up to $20,500
This example uses round, made-up numbers to show how the costs build up. The LC stays open for 180 days. The exporter is paid 90 days after the documents are accepted. Waiting 90 days for $1,000,000 costs money. Here we use 6.00% a year, counted on a 360-day year. Whoever pays for the wait carries this cost. Real fees and rates vary by bank, country and deal.
Figure 3 · Illustrative
Costs on a $1,000,000 usance LC with 90 days to pay
Illustrative inputs. The total is highlighted.
Made-up rates, worked out by our checking script. The 360-day year follows the US money market convention (Federal Reserve, H.15). Your bank's fees and rates will differ.
05 · When to use it
A usance LC suits buyers who need time to pay and sellers who still want a bank's promise
Good fit when
- The buyer needs the goods, or the money from reselling them, before paying, and the seller still wants a bank's promise to pay (ICC Academy).
- You are selling to a new buyer, or the deal carries higher risk, and you trust the buyer's bank (US ITA).
- As the seller, you can wait, or you can get paid early at a discount against the bank's promise.
Another tool may suit better when
- You need your money at shipment. A sight LC pays once the documents match.
- Both sides want little paperwork and low cost. An LC takes work and is relatively expensive (US ITA). Look at a documentary collection against acceptance or open account.
- You are unsure about the buyer's bank. Ask for a confirmed letter of credit, where a second bank adds its promise.
06 · Rules and a real case
An LC follows the ICC rules it names, and a court has ruled on who owns the debt a deferred payment LC creates
When an LC says it follows , those ICC rules apply. They have been in force since July 1, 2007 (ICC). They cover deferred payment and acceptance as well as payment at sight (ICC Academy). Banks check documents using , 2023 edition (ICC). The , version 2.1, covers documents sent electronically (ICC).
A real case. In Taurus Petroleum v SOMO, decided on October 25, 2017, the UK Supreme Court looked at letters of credit issued by Credit Agricole in London. They were in favor of SOMO, the State Oil Marketing Company of Iraq. Each one was "available by deferred payment at thirty (30) days from bill of lading date". The court held that SOMO, as the beneficiary, was the sole owner of the debts the LCs created. That allowed court orders against those debts, called third party debt orders (UK Supreme Court judgment).
Summary
A usance LC gives the importer time to pay, while the exporter holds a bank's promise
The exporter is paid on the maturity date, once the bank finds the documents match the LC. The importer gets the goods first and pays its bank later. The exporter can wait, or get paid early at a discount. The trade-off is paperwork, fees and the cost of the wait, so it pays to get the documents right the first time.
Related guides: Letters of credit; The payment terms spectrum; How trade finance is priced. Related cards: Letter of credit (sight); Confirmed letter of credit; Forfaiting; Bill of exchange and promissory note. Every term is in the Trade Finance Glossary.
Sources
- ICC Academy, Types of documentary credit: a comprehensive guide, October 21, 2024. Supports: deferred payment and acceptance, payment at maturity, the roles of the banks, confirmation
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters (2022 edition), Chapter 4, July 2022. Supports: definition, payment against documents only, discrepancies, when an LC fits, its costs and effort
- UK Supreme Court, Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64, October 25, 2017. Supports: the 30-day deferred payment example and the real case
- International Chamber of Commerce, UCP 600, Uniform Customs and Practice for Documentary Credits, in force July 1, 2007. Supports: the rules an LC can follow
- International Chamber of Commerce, International Standard Banking Practice (ISBP), 2023 edition, 2023. Supports: document checking practice
- International Chamber of Commerce, eUCP Version 2.1, June 29, 2023. Supports: electronic presentation
- Board of Governors of the Federal Reserve System, H.15 Selected Interest Rates, September 29, 2026. Supports: the 360-day year in the worked example
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