Legal Definitions - usance credit

A usance credit, also known as a time letter of credit, is a financial instrument primarily used in international trade to guarantee payment from a buyer to a seller at a specified future date, rather than immediately. Unlike a "sight credit" where payment is made upon presentation of documents, a usance credit allows for deferred payment. It is a promise from a bank to pay the seller (beneficiary) for goods or services after a certain period has passed (e.g., 30, 60, 90, or 120 days) following the shipment of goods or presentation of required documents. This arrangement provides the buyer with a grace period to receive, inspect, and potentially sell the goods before the payment becomes due, while still assuring the seller that payment is guaranteed by a bank.

Example 1: International Apparel Trade

• A large fashion retailer in the United States orders a significant quantity of clothing from a manufacturer in Vietnam. The retailer wants to receive the garments, clear them through customs, and begin distributing them to its stores before making payment.
• To facilitate this, they arrange for a usance credit. The U.S. retailer's bank issues a letter of credit promising to pay the Vietnamese manufacturer 90 days after the shipping documents are presented. This allows the U.S. retailer three months to receive the goods, get them on shelves, and potentially generate sales revenue before the payment obligation matures, while the manufacturer has the security of a bank-guaranteed payment.

Example 2: Raw Material Import for Manufacturing

• A European pharmaceutical company imports a large shipment of a specialized chemical compound from a supplier in India. The company needs time to transport the compound from the port, conduct quality control checks, and integrate it into its manufacturing process before the final product is ready for sale.
• They utilize a usance credit with a 60-day payment term. The European bank guarantees payment to the Indian supplier two months after the chemical compound is shipped. This deferred payment period allows the pharmaceutical company to manage its cash flow more effectively, as it can begin the production process and potentially secure sales for the finished medicine before the payment to the chemical supplier is due.

Example 3: Heavy Machinery Acquisition

• An Australian construction company purchases specialized heavy excavation machinery from a German manufacturer. The machinery is expensive and requires significant time for shipping, installation, and testing at the construction site before it can be fully operational and contribute to the company's project revenue.
• They agree on a usance credit with a 120-day payment period. The Australian bank commits to paying the German manufacturer four months after the machinery is dispatched. This extended period gives the construction company ample time to receive the equipment, install it, conduct necessary trials, and ensure it's functioning correctly, aligning the payment schedule more closely with the operational readiness and revenue generation from the new asset.