The situation of UPAS LC happens when the exporter/beneficiary want immediate payment for his goods but the applicant may not have the facility with his bank to issue sight LC’s.

Under this Letter of credit, the exporter will get the payment at sight if the documents are credit compliant.

The importer will be charged interest, acceptance commission and other charged as per the terms of LC for using this letter of credit.

On the other hand, if the applicant provides usance LC and the beneficiary will arrange to get the bill immediately from his bank, is called discounting. Usually, the discount fee and interest will be charged against the account of the beneficiary.

Conditions for using UPAS Letter of Credit

• Customers using UPAS LC must satisfy all conditions exists in LC
• The customer will present the usance draft
• This usance draft will be paid by discount on at the sight basis

Benefits to Exporter

• The exporters will receive money immediately from the discounting bank
• Reduces Days Sales Outstanding (DSO) with receipt of payment “at sight”

• This LC increases the marketability of products by providing buyers with the incentive of extended payment terms
• Keeps the integrity of the price, as the seller does not need to build in the cost of covering extended payment terms
• Maintains quality of receivables because payment assurance is still secured through the letter of credit
• Strengthens relationships with buyers by allowing for extended payment terms and the availability of lower-cost financing

Benefits to Importer

• The interest rate is comparatively lower than any other finance
• It helps to optimize working capital
• Payment to be deferred up to 360 days
• Foreign currency may be bought at the preferential price
• This is a simple and convenient method
• This LC strengthens the relationships with the exporter by allowing for payment at sight.
• It enhances Days Payable Outstanding (DPO) by providing extended payment terms

• It helps to provide an additional source of liquidity

Cost of UPAS LC and Who will pay? 

The costs of UPAS LC and costs of other LC are almost similar. Following cost are associated with LC/UPAS LC:

The cost will be paid by the importer:

• LC issuing Commission
•  LC Transmission Charge
• Acceptance Commission
• Reimbursement Charge: As beneficiary usually claims full payment, reimbursement expenditure will be borne by the applicant (issuing Bank)
• Interest on funding for UPAS LC

The cost will be borne by the exporter:

• LC Advising Charge
• LC Confirmation Charge.
• Discrepancy Charge
• Payment Charge

Credit Period of UPAS LC

UPAS Funding for raw materials would be extended to 180 days but in case of capital machinery, this credit term would be 180 days/ 270 days/ 360 days/ 720 days.

Conclusion

There is no basic difference between Usance Payable at Sight Letter of Credit and Traditional usance letter of credit except for interest charge. In this respect, interest is charged additionally for using UPAS LC fund i.e. LC payment made after a particular period of time.

Under UPAS LC, the extended payment terms of buyer don’t affect the exporter as exporter receiving payment on due time.

The buyer pays its issuing bank at the end of the payment term as mentioned in UPAS LC.