Differences between Export Letters of Credit (LC) and Import Letters of Credit (LC)

Importers and exporters across borders widely use Letters of Credit (LC) to facilitate secure and reliable transactions While both export LC and import LC serve a similar purpose of ensuring payment in trade transactions, there are key differences between the two. This article explores the differences between export LC and import LC and how they impact businesses engaged in international trade.

Export Letters of Credit (LC)

A bank issues an Export LC on behalf of an exporter (seller) to guarantee payment for goods or services delivered to an overseas buyer (importer). The Export LC serves as a commitment by the importer’s bank to pay the exporter a specified amount, provided that the exporter meets all the terms and conditions outlined in the LC.

Key Differences between Export LC and Import LC:

Issuing Party: The primary difference between export LC and import LC is the party that initiates the LC. In an export LC, the exporter’s bank issues the LC on behalf of the exporter to guarantee payment from the importer’s bank. In contrast, in an import LC, the importer’s bank issues the LC on behalf of the importer to guarantee payment to the exporter.

Payment Direction: Another key difference is the direction of payment. In an export LC, the importer’s bank pays the exporter’s bank once the exporter presents the required documents proving shipment of goods or provision of services.

In an import LC, the importer’s bank pays the exporter when the exporter presents compliant shipping documents.

Compliance Requirements: The country of import or export and the type of goods or services involved set the compliance requirements for export and import LCs. Exporters and importers must prepare all documents accurately to avoid delays or payment discrepancies.

Risk Allocation: Export LC and import LC also differ in terms of risk allocation. In an export LC, the risk of non-payment is borne primarily by the importer’s bank, as it has issued the LC guaranteeing payment to the exporter. In an import LC, the risk of non-delivery or non-performance is borne by the exporter, as the importer’s bank has guaranteed payment upon presentation of compliant documents.

Conclusion.

In conclusion, while export LC and import LC serve similar purposes of ensuring payment in international trade transactions, there are key differences between the two in terms of issuing party, payment direction, compliance requirements, and risk allocation. Businesses engaged in international trade must understand these differences to manage their trade finance operations effectively and mitigate cross-border risks.

Differences between Sight Letters of Credit (LC) and Usance Letters of Credit (LC)

International commerce often relies on trust, timing, and secure payment mechanisms. Among the many financial instruments used to reduce risk, Letters of Credit (LCs) remain a dominant tool. Within this category, two forms stand out for their contrasting payment structures: Sight LC and Usance LC. Although both guarantee settlement between buyers and sellers, they work in fundamentally different ways, shaping cash flow, risk, and the overall rhythm of global trade.

This article examines the distinctions between Sight and Usance LCs, explains how exchange rates affect each method, and highlights practical implications for businesses managing cross-border transactions.

What is a Sight Letter of Credit?

A Sight Letter of Credit enables immediate settlement. Once the exporter submits the required documents—such as the bill of lading, invoice, or insurance certificate—and the bank verifies compliance with the LC terms, the bank releases payment without delay. In short, ‘sight’ means instant recognition: as soon as the exporter provides the correct documents, the bank transfers the funds.

This instrument is commonly used in situations where:

The seller requires upfront liquidity.

The goods are perishable or time-sensitive.

The trading relationship is new, and neither party wants to take on extended credit risk.

For the seller, Sight LCs provide quick access to cash, which can be recycled into production or further shipments. For the buyer, however, they require immediate availability of funds, which may pressure working capital.

What is a Usance Letter of Credit?

By contrast, a Usance Letter of Credit introduces a waiting period. Instead of releasing payment immediately, the bank commits to settle after a specified time — typically 30, 60, 90, or even 180 days from the date of shipment or acceptance of documents. The term “usance” reflects this grace period.

Businesses favor Usance LCs in scenarios such as:

. Buyers need credit terms to sell goods locally before remitting payment.

. Large-volume shipments where immediate cash transfer would strain liquidity.

. Long-standing partnerships where trust already exists.

For exporters, a Usance LC means delayed payment, but it also opens opportunities to discount the receivable with a bank or financier, effectively converting it into earlier cash flow while shifting risk.

Core Differences Between Sight and Usance LCs.

While both tools serve as payment assurances, their differences ripple through trade operations. Key contrasts include:

1. Timing of Payment

Sight LC: The bank releases funds as soon as it checks and accepts the documents.

Usance LC: The bank defers payment to a future date, often months after shipment.

2. Impact on Cash Flow

Sight LC: Seller enjoys immediate liquidity; The transaction instantly reduces the buyer’s cash reserves.

Usance LC: Buyer gains time to generate revenue before paying; seller manages delayed inflows.

3. Financing Options

Sight LC: The seller requires minimal financing since the bank provides funds promptly

Usance LC: Exporters may use discounting or forfaiting to monetize receivables ahead of maturity.

4. Risk Exposure

Sight LC: Lower credit risk for the exporter, as banks release funds right away.

Usance LC: Higher credit exposure due to waiting period, though still backed by a bank guarantee.

5. Cost Implications

Sight LC: Typically carries lower financing charges but requires buyers to maintain liquidity.

Usance LC: Involves additional interest or discounting fees but provides breathing space for the importer.

The Role of Exchange Rates in Sight and Usance LCs

Global trade does not operate in a currency vacuum. Exchange rate fluctuations determine the real value of payments, especially when businesses settle contracts in foreign currencies like USD, EUR, or CNY

For Sight LCs

Since payment is immediate, businesses face minimal exchange rate risk.”

Once the bank processes the documents, it exchanges funds at the prevailing spot rate Exporters benefit from certainty, as the conversion happens close to the shipping date, reducing exposure to currency swings.

Example:
An Indian textile exporter shipping to Germany under a Sight LC receives payment within days. If the euro weakens against the rupee after shipment, the bank’s earlier conversion of funds protects the exporter from any impact.

For Usance LCs:

Exchange rate volatility is a bigger concern. Because payment may occur 90 or 180 days later, the value received in home currency may shift dramatically depending on forex market movements. Exporters may hedge through forward contracts or options to lock in favorable rates.

Example:
A Brazilian coffee exporter selling under a 120-day Usance LC to a Japanese buyer risks losing value if the yen depreciates sharply during that waiting period.Without hedging, the exporter may receive significantly less payment months later than anticipated.

Business Considerations When Choosing Between Sight and Usance LCs

1. Nature of Goods

Perishable goods (like fresh produce or seafood) lean toward Sight LCs, as sellers need immediate funds and buyers often expect rapid turnover. Exporters and importers often use Usance LCs for durable goods or machinery because extended payment terms suit these transactions.

2. Bargaining Power

Well-established exporters with high-demand goods may insist on Sight LCs. Conversely, new entrants or suppliers in competitive markets might accept Usance LCs to remain attractive to buyers.

3. Liquidity Needs

Companies with strong balance sheets can handle Sight LCs easily. Firms that depend on short-term financing may prefer Usance LCs to align outgoing and incoming cash flows.

4. Cost of Capital

Exporters must weigh the interest or discounting charges involved in Usance arrangements. Sometimes, these fees outweigh the benefits of giving buyers extended credit.

Compliance and Documentation Nuances:

Both types of LCs hinge on documentation accuracy. Discrepancies — whether minor errors in invoices or misaligned shipping dates — can delay or even nullify payment. However, timing differences influence compliance in unique ways:

In Sight LCs, mistakes create immediate bottlenecks because the bank withholds funds until it corrects them.

In Usance LCs, while banks may accept documents upfront, the waiting period means errors may surface later, complicating maturity settlement.

Companies should invest in strong trade compliance teams or partner with specialist banks to avoid costly setbacks.

The Strategic Use of Sight vs. Usance LCs:

Beyond mechanics, the choice between these instruments reflects broader trade strategies.

Sight LCs support exporters prioritizing liquidity and reduced risk. They align with industries where rapid reinvestment is essential, such as agriculture, energy, or consumer goods.

Usance LCs appeal to importers aiming to preserve working capital and manage longer distribution cycles. They align with capital-intensive sectors like infrastructure, engineering, and heavy manufacturing.

Increasingly, hybrid solutions are emerging where exporters agree to Usance terms but immediately discount receivables, achieving both buyer flexibility and seller liquidity.

Conclusion.

Sight and Usance Letters of Credit may share the same foundation — secure payment through banking channels — but their differences shape the pace and profitability of international trade. Sight LCs favor exporters seeking immediate settlement and protection against currency swings, while Usance LCs give importers breathing space and room to leverage their cash flows.

For companies navigating global markets, the decision is not just financial but strategic. The right choice depends on industry practices, risk appetite, and exposure to foreign exchange volatility. Ultimately, understanding the distinctions empowers businesses to negotiate fairer terms, align financing with operational needs, and thrive in an environment where timing and trust drive success.

About Reliance Capital Finance Limited:

Reliance Capital Finance Limited is a trusted partner in international trade finance, specializing in solutions that empower exporters and importers to manage liquidity, reduce payment risks, and optimize cross-border transactions. With deep expertise in Letters of Credit, guarantees, and structured trade instruments, we help businesses secure growth and navigate global markets with confidence..

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