International trade payments
Usance Letter of Credit and UPAS L/C Explained
A usance L/C is a credit under which the bank undertakes to pay at a future maturity date, for example 90 days after B/L date, against compliant documents. A UPAS L/C (usance payable at sight) lets the seller be paid at sight like a sight L/C, while the buyer pays only at maturity and bears the interest and financing fees.
- Exporter risk
- Risk level 2/5
- Importer risk
- Risk level 3/5
- Cost
- ●●●●●
- Applicable rules
- Usance and UPAS credits are both governed by UCP 600 and ISBP 821; UPAS terms are usually set out in the additional conditions, and URR 725 may apply where there is a reimbursing bank.
How it works
- The parties agree a usance L/C, the tenor and who bears the interest; for UPAS, the contract states that discount interest is for the buyer's account.
- The buyer asks its bank to issue a usance (deferred payment or acceptance) L/C or a UPAS L/C.
- The issuing bank sends an MT700 to the advising bank; fields 42C, 42P or 47A show the tenor and UPAS terms.
- The seller ships and presents compliant documents.
- The issuing bank examines the documents and accepts the draft or issues its undertaking to pay at maturity.
- Under a standard usance L/C, the seller waits for maturity or discounts the accepted receivable for early cash.
- Under UPAS, the financing bank (often the issuing bank or a foreign bank under arrangement) pays the seller at sight.
- At maturity the buyer pays principal and interest to the issuing bank, which reimburses the financing bank.
Parties involved
- Applicant: the importer, who pays at maturity.
- Issuing bank: undertakes to pay at maturity.
- Accepting or financing bank: accepts the draft or advances funds under UPAS.
- Advising and confirming banks: as for a sight L/C.
- Beneficiary: the exporter.
Exporter
Advantages
- Holds a bank undertaking rather than just the buyer's promise.
- Under UPAS, is paid at sight as with a sight L/C.
- A bank-accepted receivable is easy to discount, including without recourse.
Drawbacks
- Under a standard usance L/C, must wait for maturity or bear discount interest.
- Still exposed to discrepancy risk as with a sight L/C.
- If the UPAS terms allow recourse to the beneficiary, the risk is not fully removed.
Importer
Advantages
- Has time to sell the goods before paying.
- UPAS lets the buyer obtain a sight price while still paying later, often with competitive foreign currency interest.
Drawbacks
- Pays interest and acceptance or financing fees on top of normal L/C charges.
- Uses the bank credit line for longer.
- Exchange rate risk if revenue is in VND but the payable is in foreign currency.
Cost
On top of the issuance commission and usual L/C fees, usance credits carry an acceptance or deferred payment commission based on the tenor. Under UPAS the buyer also pays financing interest for the tenor, usually a reference rate for the currency plus a margin, and the financing bank's fees. The seller pays discount interest if it chooses to discount a standard usance receivable.
Practice in Vietnam
UPAS L/Cs are very popular for imports into Vietnam because companies can tap foreign currency funding from overseas banks at competitive cost while the seller is still paid at sight. A frequent problem is a sales contract that states "L/C at sight" while the credit issued is a UPAS, which worries the seller; agree this in advance and state in the contract that the seller is paid at sight and interest is for the buyer's account. Importers should hedge or at least budget for exchange rate movements to maturity and monitor their short-term foreign currency credit limits under the bank's rules.
Sight L/C vs usance L/C vs UPAS
| Criterion | Sight L/C | Usance L/C | UPAS L/C |
|---|---|---|---|
| Seller paid | When documents comply | At maturity (or earlier by discounting) | When documents comply |
| Buyer pays | When documents comply | At maturity | At maturity |
| Who bears the financing cost | Buyer (own funds or loan) | Seller (if it discounts) | Buyer (UPAS interest) |
| Bank charges | High | Higher | Highest because of financing interest |
Frequently asked questions
Is a UPAS L/C a sight L/C?
For the seller, a UPAS works like a sight L/C because it is paid when documents comply. For the buyer it is a usance credit with a deferred maturity and interest to pay.
Who pays the interest under a UPAS L/C?
Normally the buyer pays the interest and financing fees. The contract and the credit should state this clearly so that the bank does not deduct interest from the amount paid to the seller.
What is the difference between a deferred payment and an acceptance L/C?
An acceptance L/C uses a time draft accepted by the bank, which can be discounted in the market. A deferred payment L/C has no draft; the bank simply issues an undertaking to pay at maturity.
This content is for general guidance and does not replace legal or banking advice for a specific transaction.
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