Usance LC Interest & Deferred Payment Financing
How usance LC interest is calculated, how deferred-payment LCs discount, and why the choice between ACT/360 and ACT/365 day-count conventions changes the answer.
A usance LC is a letter of credit that gives the applicant a payment delay - 30, 60, 90, 180 days after sight or after the bill of lading date - at the cost of interest. That interest is the single biggest variable in the all-in price of a trade-finance deal, and it is priced using conventions that catch out first-time users. This guide covers the formula, the day-count trap, and how discounting turns a usance draft into working capital for the seller.
The usance interest formula
Interest = Face × (Reference Rate + Spread) × Days / Basis
- Face is the LC amount being financed.
- Reference rate is a money-market benchmark: SOFR for USD, EURIBOR for EUR, SONIA for GBP, MIBOR for INR.
- Spread is the discounter's margin - usually 75 to 300 bps depending on issuing-bank country and tenor.
- Days is the count from the acceptance date to the maturity date, both inclusive at one end.
- Basis is either 360 (USD, EUR) or 365 (GBP, INR) - see the ACT/360 vs ACT/365 note below.
ACT/360 vs ACT/365: the day-count trap
Money-market conventions differ by currency. USD and EUR use ACT/360 - actual days divided by 360. That means a full year of interest on USD is 365/360 = 1.0139 of the stated rate; a "6 percent" USD loan for 365 days really pays 6.083 percent. GBP and INR use ACT/365 which matches the calendar. When a bank quotes "180 days at 6 percent flat" without stating the basis, always assume ACT/360 for USD/EUR and confirm it in writing before acceptance.
Deferred-payment LCs vs usance LCs
Both defer payment. The difference is documentary: a usance LC produces an accepted bill of exchange that is legally negotiable and freely discountable. A deferred-payment LC produces only a bank promise to pay on the maturity date - no draft, no negotiable instrument. Banks can and do discount deferred-payment obligations, but the market for them is thinner and discount spreads are slightly wider. If the beneficiary plans to sell the paper before maturity, ask for a usance LC.
Discounting the draft: how forfaiting works
Once the issuing bank accepts a usance draft under UCP 600 Article 8, it becomes a bank acceptance - one of the safest short-dated instruments in trade finance. The beneficiary can sell it at a discount to their own bank or a forfaiter and receive cash today instead of waiting for maturity. The discount rate is the reference plus a country-risk spread on the issuing bank. Forfaiting is normally without recourse - the seller has no obligation if the issuing bank ultimately fails to pay.
Model it before you sign
The Usance Interest Calculator takes the LC amount, tenor, reference rate and day-count basis and returns the exact interest cost, plus the equivalent APR under the other basis so you can spot a currency mismatch. Combine it with the LC Cost Calculator for the full all-in charge, and the Forfaiting Calculator if you plan to discount early.
Frequently asked questions
How is usance LC interest calculated?#
Usance interest = LC amount × (reference rate + spread) × days / day-count-basis. The reference is typically 3-month or 6-month SOFR, EURIBOR or SONIA depending on currency; the spread reflects the acceptor's or discounter's view of counterparty risk. Days is the tenor from acceptance date to maturity date, and the basis is either 360 (money-market convention for USD, EUR) or 365 (GBP and INR).
What is the difference between usance and deferred payment LC?#
A usance LC produces an accepted draft (bill of exchange) that can be discounted in a secondary market. A deferred-payment LC has no draft - the issuing bank simply promises to pay on a future maturity date. Economically the financing is the same; legally, discounting a deferred-payment obligation is more restricted because there is no negotiable instrument. Most large banks now finance both, but rates on deferred-payment paper often carry a small premium.
Why does ACT/360 vs ACT/365 matter for LC interest?#
ACT/360 (actual days over 360) is used for USD and EUR money-market instruments; ACT/365 is used for GBP and Indian rupee. On a 180-day USD 1m LC at 6 percent, ACT/360 gives USD 30,000 of interest; ACT/365 gives USD 29,589 - a 411 USD difference on a single transaction. Banks that quote in one convention and settle in the other cost or benefit counterparties by the mismatch. Always confirm the day-count basis in the acceptance advice.
Who bears the usance interest cost?#
By default the applicant, because they are the party asking for deferred payment. In practice it depends on who initiated the tenor: if the beneficiary offered 180 days as part of the commercial terms, they typically build the discounting cost into the price. If the applicant asked for extended tenor beyond what was quoted, the LC amendment normally passes the interest cost to them via Field 71D.
Can usance LC drafts be discounted before maturity?#
Yes. Once the issuing bank accepts a draft under a usance LC, it becomes a bank acceptance and can be sold at a discount to the beneficiary's bank or a third-party forfaiter. The discount rate is the market's view of the issuing-bank risk plus a small dealer margin. The Forfaiting Calculator prices this using LIBOR-successor rates plus a country-risk premium.