A usance letter of credit and a deferred payment credit both let a buyer pay on a set future date while giving the seller a bank-backed promise that the money will arrive. The difference is mechanical, and it matters. A usance credit runs on a time draft the bank stamps “accepted,” turning the seller’s future receivable into a negotiable instrument. A deferred payment credit skips the draft; the bank simply undertakes in writing to pay at maturity. That single choice changes whether the seller can turn the receivable into cash before maturity, who carries fraud risk if something goes wrong, and what the financing costs. Both instruments sit under the Uniform Customs and Practice for Documentary Credits (UCP 600), published by the International Chamber of Commerce.1UCP 600. Uniform Customs and Practice for Documentary Credits – UCP 600
How Each One Pays the Seller
In a usance credit, the seller draws a time draft (also called a usance draft) and presents it with the shipping and commercial documents to the bank named in the credit. If the documents comply, the bank accepts the draft by endorsing it, and that acceptance is a binding obligation to pay the face amount when the tenor expires. Tenor is the countdown built into the credit, commonly 30, 60, 90, or 120 days from a defined trigger such as the bill of lading date or the date of presentation.
A deferred payment credit reaches the same delayed-payment outcome without a piece of paper to endorse. Once the issuing bank determines the presentation complies, it incurs a deferred payment undertaking: a direct written promise to pay a fixed amount on a fixed future date. UCP 600 Article 7 makes the duty explicit, and the maturity is calculated the same way it would be in a usance credit.1UCP 600. Uniform Customs and Practice for Documentary Credits – UCP 600 There is no draft to stamp, endorse, or circulate; the bank logs the obligation internally and pays on the due date.
To the buyer, the two look almost identical. The account is debited on the maturity date for the face amount plus processing fees. To the seller, the day-of-maturity result is also the same. What changes is everything that can happen between presentation and maturity.
Getting Cash Before Maturity
The accepted draft in a usance credit is a negotiable instrument. Once a bank has stamped its acceptance, the draft functions like a post-dated payment order backed by a regulated financial institution, and the seller can sell it. Under UCP 600, negotiation means a nominated bank purchasing drafts or documents by advancing funds to the seller on or before the day reimbursement is due from the issuing bank.1UCP 600. Uniform Customs and Practice for Documentary Credits – UCP 600 The seller can also sell the accepted draft outright to a forfaiter, without recourse, and walk away with immediate cash. The forfaiter then collects from the issuing bank at maturity.2International Trade Administration. Trade Finance Guide Chapter 11 Forfaiting
A deferred payment credit is harder to turn into early cash. UCP 600 does not give one bank a mechanism to discount another bank’s deferred payment undertaking. A nominated bank can prepay its own undertaking, but only if it incurred that undertaking in the first place. Sellers who expect to need cash before the maturity date typically ask for a usance credit precisely for this reason.
The discount the seller accepts depends on the benchmark interest rate at the time, the issuing bank’s credit standing, the buyer’s country risk, and how much time is left on the tenor. In forfaiting, the exporter usually prices this cost into the sale price at the outset.2International Trade Administration. Trade Finance Guide Chapter 11 Forfaiting
Who Bears the Fraud Risk
Fraud risk splits differently between the two instruments, and this is more than a theoretical point. In Banco Santander v. Bayfern, the English courts held that when a confirming bank discounts a deferred payment credit and fraud is later discovered before maturity, the confirming bank bears the loss rather than the issuing bank. The reasoning was that a deferred payment credit authorizes payment only at maturity; any early advance is the confirming bank’s own commercial decision, and its own risk.
That precedent does not translate cleanly to acceptance credits, because the accepted draft is a negotiable instrument with its own legal standing separate from the underlying credit. A confirming bank that discounts an accepted draft is in a different legal position from one that prepays a deferred payment undertaking. For exporters and their financing banks, this is one of the strongest reasons to prefer a usance structure when early discounting is on the table.
Which One to Ask For
A usance credit is the natural choice when the seller wants the option to convert the receivable to cash before maturity, when a forfaiter or discounting bank is already in the picture, or when the seller wants a tradeable instrument in hand rather than a bank’s internal undertaking. It is also the more familiar structure in markets that lean heavily on draft-based trade finance.
A deferred payment credit works when neither party expects the receivable to be discounted, and when the parties prefer to avoid the paperwork and stamp duties that some jurisdictions attach to drafts. It reads more cleanly in banks’ internal systems because there is no physical instrument to track. The trade-off is the narrower path to early liquidity and the different fraud-risk profile.
One boundary worth naming: neither instrument is a sight credit. Both delay payment to a future date. If the seller needs to be paid on presentation of complying documents, the right instrument is a sight letter of credit, not a usance or deferred payment structure.
Cost Differences That Follow From the Choice
Issuance fees for either credit generally run 0.75% to 2% of face value, and a confirmation, when the seller requires one, typically adds 0.25% to 2% depending on how the confirming bank rates the issuing bank and the buyer’s country. Those baseline charges do not turn on whether the credit is usance or deferred payment.
The cost gap opens up around discounting. Because a usance draft is tradeable, the seller who discounts it pays a market discount rate driven by benchmark interest rates and the risk margin described above, and can shop that discount to more than one buyer. A deferred payment credit that the seller wants prepaid can generally be prepaid only by a bank that already carries the undertaking, which limits competition on price. Some jurisdictions also charge stamp duty on drafts, which pushes cost the other way and can make deferred payment structures cheaper in those specific markets. The right comparison is always the total cost through to the seller’s actual pay date, not the headline issuance fee.
The Rules That Govern Both
Whichever structure is chosen, the same UCP 600 framework governs the obligations. Under Article 7, the issuing bank must honour a complying presentation regardless of whether any other bank has already paid the seller. Article 7(c) also requires the issuing bank to reimburse a nominated bank that honoured or negotiated a complying presentation, and that reimbursement is due at maturity whether or not the nominated bank prepaid the seller.1UCP 600. Uniform Customs and Practice for Documentary Credits – UCP 600 The issuing bank cannot refuse reimbursement simply because a nominated bank chose to advance funds early.
A confirming bank’s undertaking is separate from the issuing bank’s and survives issuer failure or country-level capital controls. Once a confirming bank determines documents comply and pays the seller, it cannot later be refused reimbursement on the ground that the issuing bank disagrees about compliance.3International Chamber of Commerce. Banking Commission Technical Advisors Briefing No 13 Confirmation of a Documentary Credit Under UCP 600 Sellers dealing with buyers in higher-risk countries routinely insist on a confirmation for exactly this reason, and the confirmation attaches to either a usance or a deferred payment structure.
A nominated bank is different. Under Article 12, nomination alone does not oblige a bank to do anything. Unless the nominated bank is also the confirming bank, or has expressly agreed and communicated that agreement to the seller, it can decline to act.4UCP 600. UCP 600 Article 12 Sellers who assume their local bank will automatically advance funds against a credit sometimes find out at the worst possible moment that it will not. That risk applies to both usance and deferred payment credits, and it is a separate question from which of the two structures the credit uses.