Usance LC vs Sight LC: When to Use Deferred Payment & Discount Impact

Sight vs Usance: Understanding Payment Timing in LCs

Sight LC: The buyer's bank pays the seller immediately upon presentation of complying documents. The seller gets cash on day 1.

Usance LC: The buyer's bank accepts a bill of exchange (draft) but defers payment. Payment is due 30, 60, 90, or 180 days after a specified date (typically B/L date or presentation date). The seller can discount the accepted draft with a bank to get cash immediately.

How Usance Works: The Mechanics

Step 1: LC States "Usance 90 Days from B/L Date"

Field 42C in the MT700 specifies: "Usance 90 days from date of Bill of Lading, accepted by [nominated bank]."

Step 2: Seller Ships and Presents Documents

Seller presents: commercial invoice, on-board B/L (dated, say, January 15), insurance, etc.

Step 3: Bank Accepts the Draft

Nominated bank draws and accepts a bill of exchange (draft) reading: "Pay to the order of [seller] USD 500,000 on April 15, 2026" (90 days after January 15 B/L date).

Step 4: Seller Has Two Choices

• Option A: Wait 90 days (until April 15) and collect full USD 500,000 from the accepting bank
• Option B: Discount the draft with a bank on January 20 and get less than USD 500,000 today

Step 5 (If Seller Chooses Discount): Discounting Mechanism

Seller takes the accepted draft to a bank (usually the nominated/negotiating bank, or seller's home-country bank). That bank agrees to pay the seller today in exchange for the right to collect USD 500,000 from the accepting bank on April 15.

Bank charges interest (discount fee) for this time-value-of-money service. The interest is deducted from the USD 500,000 face value.

Usance Interest Calculation

Formula: Interest = Principal × Annual Rate (%) × Number of Days ÷ Day-Count Divisor

Day-count divisor: Depends on currency (ACT/360 or ACT/365):

Note: ACT/365 gives a slightly lower interest cost (difference: 1.4% on the calculated fee) because the divisor is larger. This is why usance in GBP is marginally cheaper than in USD for the same nominal tenor and rate.

Real Example: USD 500,000 Usance LC Discount

Discount Rate vs Usance Interest Rate: What's the Difference?

These terms are often used interchangeably, but technically:

• Usance interest rate (Field 42C): The rate the accepting bank implicitly charges (defined in the LC terms; often market rate + spread)
• Discount rate (for discounting): The rate a discounting bank charges to buy the draft early. Usually lower than usance interest (e.g., LIBOR + 1–2%)

Example:

• LC says "usance 90 days at 4.5%" → accepting bank charges 4.5% interest from B/L date to maturity
• Seller goes to discount bank and that bank offers "I'll discount at 3.5%" → seller gets better rate by discounting with a third bank (competitive bidding)
• Seller discounts at 3.5% instead of waiting and accepting 4.5%

Sight LC vs Usance LC: Side-by-Side Comparison

When to Choose Usance vs Sight

Choose Sight LC If:

• Seller needs immediate cash (tight working capital)
• Buyer is unknown or high-risk
• Commodity is perishable or volatile (grains, oils, energies)
• Seller prefers to avoid discounting fees

Choose Usance LC If:

• Buyer asks for payment terms (30–180 days)
• Buyer is established/creditworthy
• Seller can afford to wait (or discounts at favorable rate)
• Usance discounts are available at competitive rates (≤3–4%)
• Seller can use proceeds to finance other operations

Negotiating Usance Terms

For Buyers (Applicants)

• Negotiate tenor: Push for 90 or 180 days if buyer needs cash flow relief. Standard market usance: 30–90 days.
• Specify usance interest rate in LC: If usance, clearly state "Usance 90 days at 3.5% p.a." in Field 42C. Ambiguity = disputes.
• Ensure discounting is available: Ask seller whether they plan to discount; if so, confirm the nominated bank will accept discount requests.

For Sellers (Beneficiaries)

• Agree to usance only if discounting available: If you plan to discount, confirm the discounting bank upfront. Don't accept usance terms if no bank will discount.
• Shop discount rates: Multiple banks (nominated bank, your home-country bank, trade finance specialists) will quote different discount rates. Compare.
• Factor discounting cost into pricing: If usance discounting costs 4%, your effective net proceeds drop 4%. Include this in your pricing vs a sight LC competitor.

FAQ: Usance & Sight

Q: If I discount a usance draft, do I lose recourse if the accepting bank fails?

A: Typically, yes. When you discount (sell) the draft, you transfer all claims to the discounting bank. If the accepting bank later dishonors (refuses to pay on maturity), the discounting bank pursues the accepting bank, not you. This is why discounting a draft from a top-tier bank is safe; discounting a draft from an unknown regional bank carries risk.

Q: Can I negotiate usance rate down?

A: In the LC itself (Field 42C), the usance rate is set at issuance. But when discounting with a third bank, you can negotiate the discount rate down. Banks compete for usance discount business; if you have volume, you can get preferential rates.

Q: Is 90-day usance at 4% cheaper than 30-day usance at 4%?

A: No. Interest accrues daily: 4% × 90 days = 1.00% total interest; 4% × 30 days = 0.33% total interest. Longer tenor = higher total interest. But in absolute USD, the 90-day cost is USD 5,000 vs the 30-day cost of USD 1,667 (for USD 500k principal).

This guide is for trade finance education. Usance LC terms, discount rates, and discounting availability vary by bank, market conditions, and counterparty risk. Always confirm discounting availability and rates with your bank before committing to usance terms. Refer to UCP 600 Article 6 & 42 for definitive rules.