A "90 days against LC" term in a Letter of Credit (LC) means the exporter will be paid 90 days after the documents are presented to the issuing bank, confirming compliance with the LC terms. This is a type of deferred payment.
Here's a breakdown:
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Letter of Credit (LC): A guarantee from a bank on behalf of the buyer (importer) to the seller (exporter) that payment will be made upon fulfillment of specific conditions outlined in the LC.
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"90 Days": Specifies the duration of the payment deferral.
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"Against": Refers to the point from which the 90-day period is calculated. In this case, it's typically the date of document presentation.
How it Works:
- The exporter ships the goods.
- The exporter prepares the necessary documents as specified in the LC (e.g., Bill of Lading, commercial invoice, packing list).
- The exporter presents these documents to their bank (the advising bank).
- The advising bank forwards the documents to the issuing bank (the buyer's bank).
- The issuing bank examines the documents to ensure they comply with the LC terms.
- If the documents are compliant, the issuing bank accepts them and acknowledges the deferred payment obligation.
- The 90-day period begins from this acceptance date.
- After 90 days, the issuing bank makes the payment to the exporter (or their advising bank).
Key Considerations:
- Risk for the Exporter: The exporter bears the risk of non-payment for 90 days after shipment. They essentially extend credit to the importer.
- Negotiation: Payment terms are negotiable between the buyer and the seller before the LC is issued.
- Discounting: The exporter can sometimes discount the LC with a bank to receive payment earlier, albeit at a reduced amount. This essentially involves selling the right to receive payment to the bank.
- Financing: The importer benefits from deferred payment, as it allows them more time to generate revenue from the goods before needing to pay.
Example:
Imagine a company in China exports electronics to a company in the US under a 90-day LC. The Chinese company ships the goods on January 1st. They present the documents to their bank on January 15th. The issuing bank in the US accepts the documents on January 20th. The Chinese company will receive payment 90 days after January 20th, which is April 20th.
In summary, "90 days against LC" is a deferred payment term where the exporter gets paid 90 days after the bank accepts the documents presented under the Letter of Credit. This arrangement involves risk for the exporter and provides financing benefits for the importer.
