【Trade Finance】What a Usance LC Is and How It Finances Commodity Buyers
Quote from chief_editor on June 10, 2026, 5:30 pmUsance LC in commodity trade finance explained. Learn how deferred payment LCs give buyers credit terms and how sellers manage payment timing risk.
A Usance Letter of Credit (LC) — also called a Term LC, Deferred Payment LC, or Time LC — is a letter of credit under which payment to the seller is not made immediately upon presentation of compliant documents, but is deferred for a specified period after the document presentation or after the Bill of Lading (BL) date. Common usance periods are 30, 60, 90, or 180 days. The Usance LC provides the buyer with an implicit financing facility: the buyer takes delivery of the commodity and has the usance period to generate revenue from it before the payment falls due.
The difference between a Sight LC and a Usance LC is that a Sight LC requires payment immediately upon compliant document presentation, while a Usance LC creates a deferred payment obligation that the buyer must honor at a future, contractually specified date.
How a Usance LC Works in Practice
The mechanics of a Usance LC follow the same documentary process as a Sight LC, with one critical difference at the payment stage. First, the buyer opens a Usance LC specifying the usance period — for example, 90 days from the Bill of Lading date. Second, the seller ships the cargo and presents the compliant document set to the confirming or advising bank. Third, the bank checks the documents and, if they comply, accepts the deferred payment obligation — this bank acceptance is a legally binding commitment to pay the stated amount on the maturity date. Fourth, the seller holds the accepted obligation until maturity and receives payment on day 90 after the BL date. Fifth, the buyer has had 90 days from the BL date to sell or process the commodity, generating the cash to repay the bank.
For example, assume a palm oil trading company in Singapore sells 3,000 metric tons of Refined, Bleached and Deodorized (RBD) palm olein to a food manufacturer in Pakistan. The manufacturer opens a 90-day Usance LC. The Singapore trader ships the cargo and presents documents; the bank accepts the payment obligation. The Pakistani food manufacturer receives the palm oil, processes it into packaged edible oil, sells it into the domestic market over the following two months, and collects sufficient revenue to honor the LC payment when it falls due 90 days after the BL date.
The implicit financing cost of a Usance LC is borne either by the buyer or by the seller, depending on how the contract price is structured. If the seller agrees to accept usance terms without adjusting the price, the seller is effectively providing free credit for the usance period — which reduces the seller's effective yield. More commonly, the seller prices the usance cost into the commodity price: the CIF price quoted under 90-day usance terms is higher than the price quoted for sight payment, with the difference reflecting the financing cost for 90 days.
Usance LC Discounting and Early Payment
A seller who needs cash before the usance maturity date can approach the confirming bank or another bank to discount the accepted Usance LC. Discounting involves the bank paying the seller immediately at a discount — the face amount minus interest for the remaining usance period — while the bank waits until maturity to collect from the buyer's bank. The discount rate reflects the creditworthiness of the accepting bank and prevailing interest rates.
For example, assume the accepted Usance LC is for $1 million payable in 90 days, and the discount rate is 5% per annum. The 90-day discount cost is approximately $12,500. The bank pays the seller $987,500 immediately and collects $1 million at maturity. The seller has converted a 90-day deferred payment into immediate cash at a modest cost.
Usance LCs are particularly common in trade flows between commodity exporters in Asia and the Middle East and buyers in South Asia, Africa, and the Middle East, where buyer credit availability is limited and deferred payment terms are commercially necessary to support the transaction.
A Usance LC is a financing instrument embedded in a payment mechanism — it converts a commodity seller's receivable into a deferred but bank-guaranteed payment, giving the buyer time to liquidate the commodity before the payment obligation falls due.
Usance LC in commodity trade finance explained. Learn how deferred payment LCs give buyers credit terms and how sellers manage payment timing risk.
A Usance Letter of Credit (LC) — also called a Term LC, Deferred Payment LC, or Time LC — is a letter of credit under which payment to the seller is not made immediately upon presentation of compliant documents, but is deferred for a specified period after the document presentation or after the Bill of Lading (BL) date. Common usance periods are 30, 60, 90, or 180 days. The Usance LC provides the buyer with an implicit financing facility: the buyer takes delivery of the commodity and has the usance period to generate revenue from it before the payment falls due.
The difference between a Sight LC and a Usance LC is that a Sight LC requires payment immediately upon compliant document presentation, while a Usance LC creates a deferred payment obligation that the buyer must honor at a future, contractually specified date.
How a Usance LC Works in Practice
The mechanics of a Usance LC follow the same documentary process as a Sight LC, with one critical difference at the payment stage. First, the buyer opens a Usance LC specifying the usance period — for example, 90 days from the Bill of Lading date. Second, the seller ships the cargo and presents the compliant document set to the confirming or advising bank. Third, the bank checks the documents and, if they comply, accepts the deferred payment obligation — this bank acceptance is a legally binding commitment to pay the stated amount on the maturity date. Fourth, the seller holds the accepted obligation until maturity and receives payment on day 90 after the BL date. Fifth, the buyer has had 90 days from the BL date to sell or process the commodity, generating the cash to repay the bank.
For example, assume a palm oil trading company in Singapore sells 3,000 metric tons of Refined, Bleached and Deodorized (RBD) palm olein to a food manufacturer in Pakistan. The manufacturer opens a 90-day Usance LC. The Singapore trader ships the cargo and presents documents; the bank accepts the payment obligation. The Pakistani food manufacturer receives the palm oil, processes it into packaged edible oil, sells it into the domestic market over the following two months, and collects sufficient revenue to honor the LC payment when it falls due 90 days after the BL date.
The implicit financing cost of a Usance LC is borne either by the buyer or by the seller, depending on how the contract price is structured. If the seller agrees to accept usance terms without adjusting the price, the seller is effectively providing free credit for the usance period — which reduces the seller's effective yield. More commonly, the seller prices the usance cost into the commodity price: the CIF price quoted under 90-day usance terms is higher than the price quoted for sight payment, with the difference reflecting the financing cost for 90 days.
Usance LC Discounting and Early Payment
A seller who needs cash before the usance maturity date can approach the confirming bank or another bank to discount the accepted Usance LC. Discounting involves the bank paying the seller immediately at a discount — the face amount minus interest for the remaining usance period — while the bank waits until maturity to collect from the buyer's bank. The discount rate reflects the creditworthiness of the accepting bank and prevailing interest rates.
For example, assume the accepted Usance LC is for $1 million payable in 90 days, and the discount rate is 5% per annum. The 90-day discount cost is approximately $12,500. The bank pays the seller $987,500 immediately and collects $1 million at maturity. The seller has converted a 90-day deferred payment into immediate cash at a modest cost.
Usance LCs are particularly common in trade flows between commodity exporters in Asia and the Middle East and buyers in South Asia, Africa, and the Middle East, where buyer credit availability is limited and deferred payment terms are commercially necessary to support the transaction.
A Usance LC is a financing instrument embedded in a payment mechanism — it converts a commodity seller's receivable into a deferred but bank-guaranteed payment, giving the buyer time to liquidate the commodity before the payment obligation falls due.