Usance
Usance is a type of letter of credit used in international trade, which allows the buyer to make the payment within a certain period after receiving the goods. Unlike a sight letter of credit, a usance letter of credit grants the buyer a specific period (usually 30 days, 60 days, 90 days, or longer) to make the payment.
Definition: Deferred payment is a method of international trade payment where the buyer pays within a certain period after receiving the goods. Unlike a sight letter of credit, a deferred letter of credit allows the buyer to pay within a specified period (usually 30, 60, 90 days, or longer).
Origin: The concept of deferred payment originated from the needs of international trade, aiming to provide greater flexibility and security for both buyers and sellers. As early as the 19th century, with the expansion of global trade, deferred payment gradually became a common payment method to address time differences in long-distance transportation and cross-border transactions.
Categories and Characteristics: Deferred payment mainly falls into two categories: 1. Deferred Letter of Credit: Issued by a bank, guaranteeing payment to the seller upon the buyer's due payment. 2. Deferred Bill of Exchange: Issued by the seller, accepted by the buyer, and paid on the due date. Characteristics include:
- Buyers have more time to gather funds.
- Sellers receive immediate payment guarantees from the bank after delivery.
- Suitable for bulk commodities and long-distance transportation transactions.
Case Studies: Case 1: A Chinese company exports electronic products to a US company, agreeing to use a deferred letter of credit with a 60-day payment term. After shipment, the US company pays within 60 days, ensuring liquidity. Case 2: A German company sells machinery to a Brazilian company using a deferred bill of exchange with a 90-day payment term. The Brazilian company accepts the bill upon receiving the equipment and pays after 90 days, while the German company discounts the bill through a bank to receive funds earlier.
Common Questions: 1. What are the risks of deferred payment? Answer: The main risk is the buyer's credit risk, i.e., the buyer's inability to pay on the due date. 2. How to mitigate the risks of deferred payment? Answer: Risks can be mitigated through bank guarantees, credit insurance, etc.
