Usance Payment At Sight (UPAS) is a payment mechanism that combines the benefits of Sight Letters of Credit and Usance Letters of Credit. It is actually a derivative solution that narrows the conflicting interests of importers and exporters. This is a structured trade finance tool that can create liquidity for the exporter on a sight basis while allowing the importer usance terms. In this article, we have put together all you need to know about UPAS.
We shall start by defining Sight LCs and Usance LCs.
A sight lc is a letter of credit that guarantees payment to the beneficiary on the presentation of documents (usually invoices and shipping documents) at the counters of the nominated bank. The issuing bank pays the exporter once it has ascertained that the goods have been shipped in accordance with the terms of sale.
A usance lc, on the other hand, is a letter of credit whereby payment is deferred until a certain period after documents are presented to the bank. This type of LC allows buyers more time to raise funds and pay for goods they have purchased. It also gives sellers some assurance that they will eventually be paid for their products.
What is the difference between usance and sight LC?
The key difference between these two types of letters of credit is that Sight L/Cs are payable on the presentation of documents, while usance lc is payable at a later date. The latter option means that they will be out of pocket until the L/c matures.
The ideal situation for the buyer is to get an extended period of credit while enjoying the protection from using an L/c.
The ideal situation for the seller is to get paid on presentation, no matter what the cost or value of money might be at that time.
In practice, however, there are usually conflicting views between importers and exporters on this. The buyer needs a certain amount of time to raise funds before being able to pay; while the seller wants his payment immediately upon presenting shipping documents. Usance Payment At Sight attempts to solve this conundrum by offering benefits common in both sight letters of credit and usance letters of credit without losing their respective advantages. This means Usance Payment At Sight gives suppliers greater assurance about getting paid than Usance L/Cs, and it gives buyers more time to pay than sight letters of credit.
What is at sight payment meaning?
When the term at sight payment is used in reference to letters of credit, this means payment needs to be done as soon as compliant documents are presented to the issuing bank. There is a process to confirm if documents are compliant, though. Uniform Customs and Practices (UCP) 600 allows banks up to 7 banking days for verification of documents.
What is Usance Payment At Sight (UPAS)?
Usance Payment At Sight is a payment mechanism that combines the benefits of sight letters of credit with those found in the usance letters of credits while eliminating their respective disadvantages. It offers advantages common to both types without losing any advantage they have over each other. Essentially, Usance payment at sight gives allows the seller the protection of Usance L/c and instant working capital as provided by sight L/c transactions.
Mechanism of upas lc
The process below shows the mechanism of letters of credit that is also applicable to upas lc.
-Buyer and seller enter into negotiations and sign commercial contracts.
– The buyer requests the bank to issue an UPAS LC (Buyer and seller should confirm if their bank can upas lc as many banks do not offer it)
– The issuing bank opens an LC in favor of the exporter and sends the credit to the nominated bank.
-Beneficiary will confirm with their bank or confirming bank that they are able to offer UPAS.
– The exporter ships the goods in accordance with the terms of sale.
– Upon presentation of shipping documents, the beneficiary presents these to the nominated/confirming bank, asking for payment at sight.
-Nominated bank sends documents to the issuing bank, which confirms that the documents conform to the terms and conditions of L/c.
-Upon checking, the issuing bank accepts the documents and notifies the advising /confirming bank.
-The issuing bank or confirming will make settlement of the Letter of credit at sight and wait for money from the applicant at maturity.
-At maturity, the issuing bank recovers funds from the buyer and makes settlements to the confirming bank that recovers their money.
Under what conditions can a company use Usance Payment at sight?
#1. There must be a tradeable transaction.
#2. The buyer and seller must agree to LC as a payment mechanism. The seller might prefer advance payment instead.
#3. The buyers’ requirement should be usance terms and the seller should require sight payment.
#4. There must be a bank willing to finance the issuing bank’s LC.
#5. The L/Cs should not have any discrepancies
What are the benefits of upas lc to the Importer?
-They get credit terms for the goods they are importing. Importers love it when they use funds collected from operations to settle the L/cs.
-The price of the goods will not change from when it was ordered to when it is paid
-Protection of knowing that the exporter must perform before getting payment.
-Discount of sight payment terms will reflect in the final price.
-They get cashflow optimization by ensuring that selling activities fund the lcs at maturity without asking for funding from the banks.
What are the benefits of upas lc to the exporter?
-They get paid immediately once shipping documents are presented
-Exporters receive protection of an LC of payment assurance
-Discounting costs are lower than market
-They will maintain a high-quality receivable book.
What are the benefits to the banks?
The Issuing Bank has the benefit of offering its customer a solution that enables sellers to get their funds at sight. This is done without the use of issuing bank funds. It also enables the buyer credit terms that help the procure, sell and collect funds before LC matures for payment.
The confirming that is usually the discounting bank is offered the opportunity to fund the transaction by taking risk of the buyer’s bank.
What are the risks associated with upas lc?
-Non-payment by the issuing bank when complying documents are presented. As a supplier, you can mitigate this by asking for 1st class bank to add confirmation to LC.
-Non-payment due to discrepancies on LCs.The supplier has to make sure documents conform to terms and conditions.
-Seller’s failure to perform under the letter of credit. The buyer will only get goods if the supplier plays their role. The best way to mitigate this is to conduct due diligence before engaging the supplier.
What are the charges on a letter of credit?
To the buyer
- Issuance Commission
- Acceptance fee
- Settlement fee
- Confirming bank charges
- Courier charges
- SWIFT charges
To the seller
- LC advising fees
- Negotiation fees
- Document checking fees
- Interest on UPAS ( this can however be on account of the buyer)
What is the difference between usance lc and upas lc?
Usance LC is letters of credit that allow the buyer a number of days to make payment. They can have wording such as” 90 days after bill of lading date”. UPAS is essentially a derivative of an Usance LC with an option of paying the supply at sight.
Upas lc example
A steel manufacturer has a large order to deliver assorted steel products to a contractor who has a government contract. The contractor expects payment from the government no sooner than 210 days from the delivery day.
The manufacturer will enter into negotiations with the exporter for the import of steel raw materials. The importer will require extended credit terms of 270 days to cover the whole trade cycle. However, the exporter will be unwilling to extend such terms even under Usance L/C terms. If they accept, however, they will need to negotiate with their bank for L/c discounting facility.
This is where Usance Payment at Sight solution comes in. The importer will inform the counterparty the issuing bank is able to issue an L/c with usance terms of 270 days but with a commitment of payment at sight. The draft letter of credit will be shared, and all terms confirmed. The beneficiary if they so wish can ask for a third to add their confirmation.
The Usance L/c payable at sight will mean that the beneficiary does not need to seek facilities to support extended credit terms from their bank. The issuing bank and or confirming bank are undertaking to make payment at sight, provided that they present complying documents. The steel manufacturer on the other hand will have sufficient time to supply their customers and collect funds before maturity.
Another benefit of UPAS is that the interest charged can be lower than the usual transaction because the risk is calculated on the default probability of the issuing bank. This
In conclusion, Usance LC and UPAS LC are both great tools of trade finance that allow the importer credit terms while ensuring that they get their goods upfront. The supplier can use Usance LC as a means of assurance of payment and actually a structured trade tool. UPAS LC is perfect for suppliers who need immediate payment but also want the protection of an LC. It is important to note that discrepancies on either document can lead to non-payment. As a result, it is important for the supplier to ensure that all terms and conditions are met before shipping documents.
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