In the dynamic world of trade finance, Letters of Credit (LCs) serve as crucial instruments to ensure secure and efficient transactions between buyers and sellers across borders. Among the various types of LCs, Sight LC and Usance LC are two popular options, each catering to distinct needs of importers and exporters. But what exactly are they, and how do you determine the right one for your trade deal? Let’s break it down.

What Are Sight LC and Usance LC?

• Sight LC: This is a payment guarantee where the exporter (seller) is paid immediately upon presenting the required documents that comply with the terms of the LC. The issuing bank releases payment “at sight,” ensuring the seller receives funds without delay.

• Usance LC: Also known as a deferred payment LC, this instrument allows the buyer (importer) to pay the seller at a later date, usually within a specified credit period such as 30, 60, 90, or 180 days. The payment obligation is still guaranteed by the issuing bank, giving the seller confidence while providing the buyer with breathing room for cash flow management.

                             

Global Trade Finance Market Demand

The global trade finance market is experiencing robust growth, with an estimated value exceeding $8 trillion annually. A significant portion of trade finance transactions relies on Letters of Credit to mitigate risks for both parties. Sight LCs are favored in industries where liquidity and immediate payment are essential, while Usance LCs are prevalent in sectors requiring extended credit terms, such as machinery, electronics, and raw materials.

When to Choose Sight LC?

• For the Exporter:

  • When immediate payment is necessary to maintain cash flow.

  • For high-value goods where the seller wants reduced risk.

  • When dealing with a new buyer whose financial stability is uncertain.

• For the Importer:

  • To establish trust with a new supplier by offering immediate payment upon document compliance.

  • To secure discounts from sellers who value prompt payment.

When to Choose Usance LC?

• For the Exporter:

  • When the buyer’s creditworthiness is verified, ensuring payment at maturity.

  • To expand market reach by offering favorable credit terms to buyers.

• For the Importer:

  • When managing cash flow and liquidity is critical, as it allows time to sell imported goods before payment is due.

  • In industries with long sales cycles, such as machinery or raw materials, where deferred payment aligns with revenue timelines.

Key Differences: Sight LC vs. Usance LC

Aspect	Sight LC	Usance LC
Payment Timing	Immediate upon document compliance	Deferred, within the agreed credit period
Risk for Seller	Low	Moderate
Cash Flow Impact	Instant liquidity for seller	Better cash flow management for buyer
Cost	Generally higher due to immediate payment	Lower initial cost for the buyer

Why the Right Choice Matters

Selecting the appropriate LC type can make or break a trade transaction. Exporters often prioritize cash flow needs and risk mitigation, while importers focus on liquidity and working capital management. A misaligned choice can lead to financial strain or strained business relationships.

How to Decide: Practical Scenarios

1. Scenario 1: New Trade Relationship

   • Recommendation: Sight LC

   • Reason: It builds trust by ensuring the seller receives immediate payment upon document compliance.

2. Scenario 2: Established Trade Partnership

   • Recommendation: Usance LC

   • Reason: Extends credit terms, allowing the buyer to manage cash flow while the seller is assured of payment.

3. Scenario 3: Capital-Intensive Goods

   • Recommendation: Usance LC

   • Reason: High-value goods often require extended payment terms to align with the buyer’s revenue cycle.

4. Scenario 4: Perishable Goods

   • Recommendation: Sight LC

   • Reason: Immediate payment minimizes risk for the seller and ensures smooth operations.

Final Thoughts

In today’s competitive global trade environment, choosing between Sight LC and Usance LC requires a careful evaluation of the transaction’s context, the financial health of both parties, and market demands. Sight LCs are ideal for scenarios requiring quick payment and minimized risk, while Usance LCs provide flexibility and breathing room for cash flow management. By aligning the LC type with your business objectives, you can secure smooth, risk-free trade operations.

Looking to make the right choice for your trade finance needs? .If you’re still unsure about whether an Sight LC or  Usance LC is the right fit for your business, we’re here to help. Book a free video session with one of our trade finance experts, and we’ll guide you through the process step by step. Let’s secure your next deal together!