expr:class='"loading" + data:blog.mobileClass'>

Usance Letter of Credit (LC): Complete Process and Payment Structure Explained

Usance Letter of Credit (LC), Complete Flow
(PRE-STRUCTURE → ISSUANCE → SHIPMENT → DOCUMENT → PAYMENT → DISCOUNTING)

Many people assume an LC process starts after MT700 is issued…
In reality, the process begins before the LC is even issued

This is where the role of the seller (trader) determines whether a transaction succeeds or fails

WHAT IS USANCE LC?
A Usance LC (Deferred Payment LC) is a Letter of Credit where payment is made:
  • After a specified period (tenor)
  • Examples: 30 / 60 / 90 days

The tenor starts from:
  • Date of document acceptance, or
  • Date of shipment (depending on LC wording)

PHASE 1: PRE-STRUCTURING (BEFORE LC ISSUANCE)

STEP 1 – SELLER ↔ END SUPPLIER
Identify documents the supplier can provide
Confirm format and preparation timeline

Purpose:
Ensure all documents can fully comply with LC requirements

STEP 2 – SELLER ↔ SELLER’S BANK
(Advising / Negotiating Bank)
  • Review draft LC wording
  • Identify risks and potential discrepancies
  • Ensure the structure is workable

STEP 3 – SELLER ↔ BUYER (SPA)
Propose Usance LC as payment method
Share draft LC with buyer for agreement
Define payment tenor (30 / 60 / 90 days)

PHASE 2: LC STRUCTURE & ISSUANCE

STEP 4 – DRAFT LC (MT710 / MT701)
Issuing Bank (Buyer’s Bank) sends draft:
For seller’s review

Important:
  • Not a real LC
  • No payment obligation

STEP 5 – FINAL LC (MT700)
Issuing Bank issues:
  • MT700 via SWIFT
  • This is the official LC
  • Creates binding bank payment obligation

PHASE 3: SHIPMENT & DOCUMENT FLOW

STEP 6 – SHIPMENT (PHYSICAL EXECUTION)
Seller / End Supplier:
  • Loads goods onto vessel at port of loading
  • Goods are officially “on board”

Important:
  • Goods have NOT yet arrived at buyer’s port
  • Shipment is considered completed

STEP 7 – DOCUMENT PREPARATION
After shipment:
  • Bill of Lading (On Board BL) is issued
  • Supporting documents are prepared:
  • Commercial Invoice
  • Packing List
  • Inspection Certificate (SGS, etc.)

STEP 8 – DOCUMENT SUBMISSION (SELLER’S BANK)
Seller submits documents to:
Seller’s Bank (Advising / Negotiating Bank)

STEP 9 – PRE-CHECK (SELLER’S BANK)
Performs initial document check
Ensures basic compliance

Then forwards to:
Issuing Bank (Buyer’s Bank)

STEP 10 – FINAL CHECK (BUYER’S BANK)
Issuing Bank:
Performs strict compliance check

If compliant:
Documents are ACCEPTED

PHASE 4: PAYMENT (USANCE STRUCTURE)

STEP 11 – START OF USANCE PERIOD
After document acceptance:
Usance period begins

Example:
90 days from acceptance date

STEP 12 – MATURITY (PAYMENT DATE)
“Maturity” means:
The actual payment date by the bank

After the tenor ends:
Issuing Bank makes payment through Seller’s Bank

KEY REALITY
Banks do NOT inspect goods
Banks deal strictly with documents

CRITICAL WARNING
MT710 / MT701 are only drafts, not actual LCs
Only MT700 is a valid LC that guarantees payment
Do NOT ship based on draft LC

PHASE 5: ADVANCED – DISCOUNTING (EARLY PAYMENT)

If the seller does not want to wait until maturity:
Seller may request early payment from a bank

WHO IS THE DISCOUNTING BANK?
  • Seller’s Bank (Advising / Negotiating Bank)
  • Confirming Bank (if applicable)
  • Any financing bank

DISCOUNTING FLOW
  1. Documents accepted by Issuing Bank
  2. Seller requests discounting
  3. Bank pays early (less interest)
  4. Bank waits until maturity
  5. Issuing Bank pays the bank

EXAMPLE
LC: USD 1,000,000 (90 days)
Seller receives early: USD 970,000
Bank retains margin

RISKS
  • Seller: Cash flow exposure
  • Buyer: Gains credit period
  • Bank: Depends on Issuing Bank strength

SWIFT MESSAGES INVOLVED
  • MT710 / MT701 → Draft / Advice
  • MT700 → Actual LC
  • MT707 → Amendment

KEY INSIGHT
“Shipment triggers documents… documents trigger payment… time determines when payment is received.”

CONCLUSION
  • Usance LC = Deferred payment
  • Shipment occurs before payment
  • Documents control payment
  • Maturity determines timing

Most importantly:
“In LC transactions, payment is not based on goods… but on documents.”

Need assistance reviewing LC (MT710 / MT700) or structuring your deal? Contact us.

CONTACT US FOR ASSISTANCE:

WhatsApp:
IR. Zaki
http://www.wasap.my/60192297179/OilPetroleum

(Mr. Saif)
http://www.wasap.my/60105375779/OilPetroleum

(Ms. Nur)
http://www.wasap.my/601129291396/OilPetroleum

Email:
gngroup.sb@gmail.com
sales.gngroupsb@gmail.com

Website:
https://www.gngroupsupplies.com/
https://gngroupsupplies.blogspot.com/