Payment & trade finance

Usance (deferred-payment) letter of credit

A letter of credit under which payment falls due at a set time after complying presentation – for example 90 or 180 days after the bill of lading date. It finances the buyer, who can process and sell the goods before paying, while the seller can obtain cash early by having the bank discount the accepted claim (forfaiting). The interest for the usance period and the discount cost should be built into the price.

Related terms

Letter of credit (L/C) L/C

A documentary payment method in which the buyer’s bank (issuing bank) undertakes to pay the seller against timely presentation of complying documents specified in the credit – bill of lading, invoice, certificate of analysis, certificate of origin and so on. Banks deal only with documents, not goods, so the credit terms must match the sales contract exactly and be achievable. It is the most common secure payment method for large raw material deals and first-time counterparties.

Factoring and forfaiting

Turning receivables from credit sales into cash before maturity by assigning them to a finance provider. Factoring is used for short-term, recurring invoice receivables, with or without recourse (in non-recourse factoring the factor takes the buyer’s default risk). Forfaiting is the non-recourse discounting of individual, usually larger and longer bank-backed claims such as accepted drafts under a letter of credit or avalised bills. Both ease the exporter’s working capital.

Explained in the trade handbook

Trade handbook