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What is a usance letter of credit? Meaning, need, working, uses, and benefits
A usance letter of credit provides importers with a fixed credit period for smoother exports. Learn more about its need, process, and format in the blog.
Delays in payments often create tensions in international trade. Exporters want quick payments, while importers need more time to arrange funds. This is where the usance letter of credit (usance LC) can be a reliable solution for exporters. A usance LC allows buyers to pay after a fixed period, while still assuring exporters that they will receive payment for the goods exported. This blog explains what a usance LC is, why businesses use it, and how it works in real trade scenarios. It also covers usance LC at sight, use cases, format, benefits, and requirements.
What is a usance letter of credit (usance LC)?
A usance letter of credit (usance LC) is a trade finance instrument with which trade payments can be made after a specified credit period, such as 30, 60, or 90 days. In other words, it provides buyers with a credit timeline while ensuring sellers are guaranteed payment from a bank.
Unlike a sight LC, where payment is made instantly on document verification, usance LC allows deferred payment, making it more flexible for importers. This arrangement builds trust in international trade and provides both parties with financial certainty.
Unlike a sight LC, where payment is made instantly on document verification, usance LC allows deferred payment, making it more flexible for importers. This arrangement builds trust in international trade and provides both parties with financial certainty.
Need for usance LC
In global commerce, delayed payments can create bottlenecks. Importers may struggle to pay upfront, while exporters hesitate to extend unsecured credit. Here, a usance LC acts as a bridge by:
● Ensuring exporters receive guaranteed payment, backed by a bank.
● Offering buyers flexibility to arrange funds without stalling trade.
● Reducing the risk of default in high-value transactions.
Use cases of usance letter of credit
Usance LCs are relevant in many export circumstances, especially high-volume, long-distance, or complex transactions with international buyers. Some applications include:
● Export of bulk commodities: Indian exporters dealing in textiles, steel, agri-products, or pharmaceuticals often use usance LCs.
● Machinery and capital goods: In case of long manufacturing cycles and substantial invoice values, usance LC can help structure repayment terms to reduce buyer hesitancy and guarantee payment.
● Seasonal goods exports: Businesses exporting seasonal produce can benefit from usance LCs.3
How usance letter of credit works
The usance LC process follows a clear sequence that protects both buyer and seller while allowing deferred payment:
● Step 1: Contract and terms agreed
The importer and exporter agree to the sales contract, specifying price, shipment terms, required documents, and the usance period. The exporter confirms the buyer’s request for a usance LC before shipment.
● Step 2: Issuing bank opens the usance LC
The importer applies to its bank (the issuing bank) to open a usance LC in favor of the exporter. The issuing bank issues the LC and sends it to the exporter’s bank (advising bank).
● Step 3: Advising bank notifies the beneficiary
The advising bank notifies the exporter that the usance LC is available. The exporter reviews the LC terms for compliance and ships goods only if the LC matches the contract.
● Step 4: Exporter presents documents
After shipment, the exporter submits the required commercial and shipping documents (invoice, bill of lading, certificate of origin, insurance, etc.) to the advising or negotiating bank within the LC deadlines.
● Step 5: Bank checks and accepts draft
The advising/negotiating bank examines the documents. If they comply with the LC terms, the bank accepts a time draft (bill of exchange) or forwards the compliant set to the issuing bank for acceptance. Acceptance creates the bank’s promise to pay at maturity.
● Step 6: Payment at maturity (or early discounting)
On the maturity date, the issuing bank pays the accepted draft to the exporter (via the negotiating/advising bank). If the exporter requires immediate cash, the exporter may request discounting of the usance draft from its bank; the bank may provide funds earlier at a discount and fee.
● Step 7: Reconciliation and documents released
After payment or acceptance, banks release documents to the importer so the buyer can clear and receive the goods. The issuing bank then debits the importer’s account or arranges repayment per the contract.4
Example of usance letter of credit
Consider an SME exporter in Mumbai selling garments to a major US retailer. The buyer requests a 120-day usance period. Both entities agree on a usance LC at sight. Once the goods are shipped, the exporter submits all shipment documents to the Indian bank, which sends them to the US bank. The US bank then confirms the LC, granting the retailer 120 days to pay. After the stipulated period, payment is processed to the exporter without dispute, bridging the gap between shipment and cash inflow.5
Format of usance letter of credit
Here is a sample of what a usance LC might look like:
Benefits of usance LC
A usance LC offers clear advantages for both buyers and sellers:
For exporters:
● Guaranteed payment from the bank
● Access to pre-shipment and post-shipment financing
● Better cash flow planning
For importers:
● Flexible repayment schedule
● Ability to sell goods before making payment
● Long-term supplier relationships7
Requirements for usance letter of credit
To secure a usance LC, exporters and importers must fulfill certain requirements:
● Importer’s bank approval and creditworthiness
● Agreement on usance period and trade terms
● Submission of accurate shipping documents (invoice, bill of lading, certificate of origin)
● Compliance with RBI and DGFT regulations for international trade8
Conclusion
A usance letter of credit is a useful finance tool that balances buyer flexibility with exporter security. Indian exporters can benefit from it when entering markets where buyers demand extended credit periods. By understanding the usance LC meaning, its process, and advantages, businesses can confidently expand their trade relationships.
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Frequently Asked Questions
1. How long is the repayment grace period for a usance letter of credit?
The payment period for a usance letter of credit varies and could be anywhere between one to four months or more.
2. When is a usance letter of credit used?
A usance letter of credit is used in international trade transactions when the importer and exporter agree on a deferred payment arrangement. A usance LC provides the importer with a specific credit period (usually 30, 60, or 90 days) to make the payment, provided that all documentary requirements are met. In such situations, the issuing bank (the bank of the importer) assures the confirming bank (the bank of the exporter) that the payment will be made by a specific, mutually agreed-upon date.
3. Why should SMEs use usance letters of credit?
SMEs can use usance LC because it offers them guaranteed payment through banks while providing buyers the flexibility of deferred payment. This reduces risk, builds trust, and allows SMEs to access new markets without worrying about defaults.
Published on October 29, 2022.
Updated on November 18, 2025.
Sources:
1. https://www.tradefinanceglobal.com/posts/usance-letters-of-credit-what-are-they/
2. https://www.chandracredit.com/blog-details/49/procedure-of-getting-usance-letter-of-credit-lc-2024
3. https://www.capflow.in/blog/exploring-usance-in-letter-of-credit-lc
4. https://www.cbibank.com/wiki-en/what-is-usance-letter-of-credit-lc/
5. https://www.financely-group.com/usance-letter-of-credit-guide
6. https://www.contractdirectory.net/template/deferred-payment-letter-of-credit-usance-lc/
7. https://khatabook.com/blog/usance-letters-of-credit-what-are-they/
8. https://www.chandracredit.com/blog-details/49/procedure-of-getting-usance-letter-of-credit-lc-2024
Updated on November 18, 2025.
Sources:
1. https://www.tradefinanceglobal.com/posts/usance-letters-of-credit-what-are-they/
2. https://www.chandracredit.com/blog-details/49/procedure-of-getting-usance-letter-of-credit-lc-2024
3. https://www.capflow.in/blog/exploring-usance-in-letter-of-credit-lc
4. https://www.cbibank.com/wiki-en/what-is-usance-letter-of-credit-lc/
5. https://www.financely-group.com/usance-letter-of-credit-guide
6. https://www.contractdirectory.net/template/deferred-payment-letter-of-credit-usance-lc/
7. https://khatabook.com/blog/usance-letters-of-credit-what-are-they/
8. https://www.chandracredit.com/blog-details/49/procedure-of-getting-usance-letter-of-credit-lc-2024
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