A UPAS LC, or Usance Payable at Sight Letter of Credit, is a type of letter of credit that allows an importer (buyer) to benefit from usance (deferred payment) terms while enabling the exporter (seller) to receive payment at sight (immediately upon presentation of conforming documents). In essence, a financing bank bridges the gap between the importer's desired payment schedule and the exporter's need for prompt payment.
Here's a breakdown of how it works:
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Usance LC: A standard usance LC allows the importer a grace period before payment is due to the exporter. This provides the importer with time to sell the goods and generate revenue before needing to pay.
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The UPAS Advantage: With a UPAS LC, a financing bank steps in to pay the exporter at sight, effectively discounting the usance period. The importer, however, still pays the financing bank at the originally agreed-upon usance date, along with interest charges for the financing.
Key benefits of a UPAS LC:
- For the Exporter:
- Immediate payment upon presentation of conforming documents.
- Reduced risk of non-payment, as payment is guaranteed by the financing bank.
- For the Importer:
- Extended payment terms, allowing for better cash flow management.
- Potentially lower financing costs compared to other short-term financing options, particularly if the importer has a weaker credit rating and would face higher interest rates for a direct loan.
How it Works in Practice:
- The importer applies for a UPAS LC from their bank (the issuing bank).
- The issuing bank issues the LC, incorporating the usance terms and indicating that a financing bank will be involved.
- The exporter ships the goods and presents the documents to their bank (the negotiating bank).
- The negotiating bank presents the documents to the financing bank.
- The financing bank reviews the documents and, if conforming, pays the exporter at sight.
- The financing bank then claims reimbursement from the issuing bank.
- On the usance due date, the importer pays the issuing bank (which then settles with the financing bank) an amount that includes the principal and the interest on the financing.
Example:
Imagine an importer in Jakarta buying goods from an exporter in China. The importer wants 90 days to pay, but the exporter wants immediate payment. A UPAS LC can bridge this gap. A financing bank pays the exporter upon presentation of documents, and the importer pays the financing bank in 90 days with interest.
In Summary:
A UPAS LC offers a win-win solution by providing exporters with immediate payment and importers with extended payment terms, facilitated by a financing bank. It is particularly beneficial when the importer needs flexible payment terms and the exporter requires certainty and speed of payment.
