Usance Payable at Sight provider
Export Usance Letter of Credit
Usance Payable at Sight (UPAS L/C)
UPAS L/C, Usance Payable at Sight, is a derivative from the standard LC type (Sight L/C & Usance L/C). It is actually the combination between Sight L/C and Usance L/C. Simply saying, UPAS is an Usance L/C that is payable sight basis to the seller (beneficiary), while the payment settlement from the applicant (buyer) to the issuing bank will made on at the end of usance term.
Do you still remember one the biggest problem in trade finance? Yes, it is the different interest between the buyer and seller, which the buyer always want to have longer credit tenor, while the seller prefer to give shorter credit tenor to the buyer. This difference have given financial institution an idea to develop a letter of credit that could accommodate both interest through UPAS L/C.
If you still confuse, let’s discuss it using real case example,
Company A is a flour manufacturer in Indonesia, who on regular basis import wheat from Company B in Brazil. As you know, company A need to process the purchased wheat into floure, before they could sell and the flour to the end buyer and collect the payment to pay the exporter (Company B) in Brazil, say compay A’s cash to cash cycle is 90 days. Having said so, the most suitable trade scheme for company A is to use Usance L/C 90 days.
However, company B is not comfortable of the risk of Indonesian Bank / country risk, thus they refuse company A’s request to use Usance L/C 90 days, instead they are forcing company A to keep using Sight L/C.
In order to accommodate both parties’ requirements, the issuing bank propose a 90 days UPAS L/C solution to both parties. 90 days UPAS L/C means that it is Usance L/C 90 days to the applicant (buyer) and it is Sight L/C to the seller (beneficiary). Having said so, the issuing bank provides financing to the applicant (buyer) so the seller could still receive the payment at sight basis, while the applicant could still enjoy the 90 days credit term from the bank.
Since the issuing bank already paid the seller at sight basis, while they will only get the principal payment from the applicant (buyer) at the end of usance term (90 days), thus the issuing bank will charge financing interest to the applicant (buyer). The payment made by the bank to the seller is final (non recourse basis), thus it the same as sight L/C for the seller.
Wording in L/C :
42.C. Draft at.. 90 days after B/L (or other benchmark)
47. Additional Condition
Eventough the usance period of 90 days, this L/C is payable to the seller at sight basis. Financing interest is borne by applicant.
Note : The wording can be different among different issuing bank, but the wording should have the same meaning as the above.
UPAS L/C Diagram
Example : 90 days UPAS L/C
1. Sales contract between buyer and seller
2. Buyer (applicant) request their bank (issuing bank) to issue a 90 days UPAS L/C for the seller
3. Issuing bank , upon receiving the request, issue a 90 days UPAS L/C to seller’s bank (advising bank)
4. Seller’s bank (advising bank) then advise the UPAS LC to the seller (beneficiary)
5. Seller then ship the goods to the buyer
6. Upon shipping the goods, the seller prepare all documents as requested by the UPAS L/C, and then present the documents to their bank / bank that is specifically nominated by the UPAS L/C to receive the documents (negotiating / nominated bank).
Note : Usually advising bank & negotiating bank is the same bank, but could be different.
7. Negotiating bank checks the presented documents, then deliver the documents to the issuing bank
8. Issuing bank upon receiving the documents sent by the negotiating bank, will start check the documents within max 5 banking days, and once they find that the presented documents are comply with the UPAS L/C terms and conditions, they will pay the seller through the negotiating bank right away
9. Negotiating bank will credit the payment proceed from issuing bank to seller’s account with them
10. Buyer provides their payment undertaking for principal and interest on maturity date (day 90) to to the Issuing bank, can be in the form of signed draft (Bill of Exchange) or Promissory Notes.
11. Issuing bank then release all documents to the buyer, including Bill of Lading.
12. Payment by applicant (buyer) to the issuing bank on day 90 (maturity date) for both principal (P) & Financing Interest (I)
UPAS L/C Timetable
FAQs
| Q | What is Purchase Order Financing? |
| A | Purchase Order Financing is a solution for companies who have purchase orders from strong customers, but lack the cash flow to complete the sales. |
| Q | What is the minimum/maximum transaction? |
| A | Technically, there is no minimum Letter of Credit amount, but there is a minimum flat fee of $500 per transaction. At an 8% rate, the Letter of Credit would need to be at least $6,250 to meet this minimum. However, keep in mind that because of the costs of issuing a Letter of Credit (bank charges, document transport, etc.), it is usually beneficial for our clients to use Letter of Credits for shipments greater than $10,000.The maximum for any transaction depends on the buyer’s credit, because this buyer will become the account debtor once you have completed shipment and fulfilled the buyer’s purchase order. The maximum on a sight Letter of Credit is $1,250,000. The maximum on a usuance Letter of Credit depends again on the buyer’s credit, as well as the terms of payment. |
| Q | Is there a term commitment? |
| A | No. If your company’s obligations are met, you may choose to terminate the agreement at any time. Furthermore, your company is not obligated to finance a minimum volume, nor is your company obligated to finance every purchase order. |
| Q | Does DL Financial Limited require personal guarantees? |
| A | Yes. DL Financial Limited will always look at the merit of the transaction first, but we will then look to the strength of your company and its principals to cover any risk we see in the transaction. |
| Q | Are the Letters of Credit bank-issued? |
| A | YES. DL Financial Limited Letters of Credit are advised through a bank so the beneficiary and beneficiary’s bank know the Letter of Credit is authentic. Regardless of the issuing entity, an authentic Letter of Credit is subject to the all the rules and regulations stipulated by the Uniform Customs and Practice for Documentary Credit ICC (International Chamber of Commerce), Publication No. 500. |
| Q | Are the Letters of Credit confirmed? |
| A | YES AND SOMETIMES NO. Confirming Letters of Credit would require the client to cash secure the transactions and most clients are not in the position to do this. |
| Q | What is the difference between a Sight Letter of Credit and a Usance Letter of Credit? |
| A | Sight Letters of Credit indicate that the drafts drawn are due upon presentation of the shipping documents. ICC rules allow DL Financial Limited and your company 7 business days to review the documents for discrepancies before accepting or rejecting the documents. Upon acceptance, DL Financial Limited makes payment to the Letter of Credit beneficiary according to the instructions on the draft. If the documents are rejected, DL Financial Limited advises the beneficiary’s bank of the rejection and waits for instructions on how to dispose of the documents. The goods cannot be released if the documents are rejected. Usance Letters of Credit allow a specified number of days from the Bill of Lading date or from the presentation of the documents, before the draft matures. Again, ICC rules allow DL Financial Limited and your company 7 business days to review the documents for discrepancies before accepting or rejecting the documents. Upon acceptance, DL Financial Limited advises the beneficiary’s bank of the maturity date and makes payment to the Letter of Credit beneficiary accordingly. If rejected, DL Financial Limited advises the beneficiary’s bank of the rejection and waits for instructions on how to dispose of the documents. The goods cannot be released if the documents are rejected. |
| Q | Who qualifies? |
| A | If you have purchase orders from a credit-worthy buyer, and your gross margins are greater than 20%, you can qualify for Purchase Order Financing. Letters of Credit work for suppliers who do not need prepayment to ship the goods. Suppliers demanding deposits or T/T payments are often will to negotiate better terms with Letter of Credit. |
| Q | What is Accounts Receivable Factoring? |
| A | Accounts Receivable Factoring is a facility many of our clients use to avoid waiting 30-45-60 days for buyers on account to pay. A Factor essentially buys your invoices at a discounted rate as soon as it can verify the completed shipment with the account debtor (your company’s buyer). For a small percentage of the invoice, your company can take advantage of immediate cash. It is not necessary to Purchase Order Finance a transaction to qualify it for factoring. |
| Q | What is a UCC-1 Financing Statement? |
| A | A UCC-1 Financing Statement is a type of lien that secures a creditor. Many equipment lease companies use a UCC-1 that specifies a machine as collateral. If the debtor defaults on payment, the UCC-1 allows the equipment lease company to repossess the machine. It is typical for banks to use blanket UCC-1s to secure lines of credit, designating the debtor’s assets as collateral, and International Trade Finance utilizes the same. UCC-1s are public records and are indicative of a debtor-creditor relationship. By itself, a UCC-1 is in no way an indication of a delinquent account.
DL Financial Limited are genuine and reliable providers of loan, international project funders, Lease bank guarantee providers & providers of sblc, dlc and letters of credit.
Kindly contact us today for all your financial needs.
Skype: dl.financials.limited
Website: http://www.dlflimited.net
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Usance Payable at Sight (UPAS L/C)
UPAS L/C, Usance Payable at Sight, is a derivative from the standard LC type (Sight L/C & Usance L/C). It is actually the combination between Sight L/C and Usance L/C. Simply saying, UPAS is an Usance L/C that is payable sight basis to the seller (beneficiary), while the payment settlement from the applicant (buyer) to the issuing bank will made on at the end of usance term.
Do you still remember one the biggest problem in trade finance? Yes, it is the different interest between the buyer and seller, which the buyer always want to have longer credit tenor, while the seller prefer to give shorter credit tenor to the buyer. This difference have given financial institution an idea to develop a letter of credit that could accommodate both interest through UPAS L/C.
If you still confuse, let’s discuss it using real case example,
Company A is a flour manufacturer in Indonesia, who on regular basis import wheat from Company B in Brazil. As you know, company A need to process the purchased wheat into floure, before they could sell and the flour to the end buyer and collect the payment to pay the exporter (Company B) in Brazil, say compay A’s cash to cash cycle is 90 days. Having said so, the most suitable trade scheme for company A is to use Usance L/C 90 days.
However, company B is not comfortable of the risk of Indonesian Bank / country risk, thus they refuse company A’s request to use Usance L/C 90 days, instead they are forcing company A to keep using Sight L/C.
In order to accommodate both parties’ requirements, the issuing bank propose a 90 days UPAS L/C solution to both parties. 90 days UPAS L/C means that it is Usance L/C 90 days to the applicant (buyer) and it is Sight L/C to the seller (beneficiary). Having said so, the issuing bank provides financing to the applicant (buyer) so the seller could still receive the payment at sight basis, while the applicant could still enjoy the 90 days credit term from the bank.
Since the issuing bank already paid the seller at sight basis, while they will only get the principal payment from the applicant (buyer) at the end of usance term (90 days), thus the issuing bank will charge financing interest to the applicant (buyer). The payment made by the bank to the seller is final (non recourse basis), thus it the same as sight L/C for the seller.
Wording in L/C :
42.C. Draft at.. 90 days after B/L (or other benchmark)
47. Additional Condition
Eventough the usance period of 90 days, this L/C is payable to the seller at sight basis. Financing interest is borne by applicant.
Note : The wording can be different among different issuing bank, but the wording should have the same meaning as the above.
UPAS L/C Diagram
Example : 90 days UPAS L/C
1. Sales contract between buyer and seller
2. Buyer (applicant) request their bank (issuing bank) to issue a 90 days UPAS L/C for the seller
3. Issuing bank , upon receiving the request, issue a 90 days UPAS L/C to seller’s bank (advising bank)
4. Seller’s bank (advising bank) then advise the UPAS LC to the seller (beneficiary)
5. Seller then ship the goods to the buyer
6. Upon shipping the goods, the seller prepare all documents as requested by the UPAS L/C, and then present the documents to their bank / bank that is specifically nominated by the UPAS L/C to receive the documents (negotiating / nominated bank).
Note : Usually advising bank & negotiating bank is the same bank, but could be different.
7. Negotiating bank checks the presented documents, then deliver the documents to the issuing bank
8. Issuing bank upon receiving the documents sent by the negotiating bank, will start check the documents within max 5 banking days, and once they find that the presented documents are comply with the UPAS L/C terms and conditions, they will pay the seller through the negotiating bank right away
9. Negotiating bank will credit the payment proceed from issuing bank to seller’s account with them
10. Buyer provides their payment undertaking for principal and interest on maturity date (day 90) to to the Issuing bank, can be in the form of signed draft (Bill of Exchange) or Promissory Notes.
11. Issuing bank then release all documents to the buyer, including Bill of Lading.
12. Payment by applicant (buyer) to the issuing bank on day 90 (maturity date) for both principal (P) & Financing Interest (I)
UPAS L/C Timetable
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