Definition
Usance is a term used in international trade which refers to the time period, agreed by the buyer and seller, within which goods must be paid for after they have been received. It is also known as the credit period. This term often applies in letter of credit transactions.
Phonetic
The phonetics of the keyword ‘Usance’ is /ˈjuːzəns/.
Key Takeaways
- Definition: Usance refers to the allowable or customary period to discharge an obligation or in simpler terms, a period of time agreed between two parties to pay for goods after they have been received. This level of understanding enables businesses to operate efficiently based on credit trust.
- Function: Usance plays a vital role in international trade and commerce where business operations have to consider the delay in product delivery and distance between the countries. For the sake of smooth transactions, parties sign contracts that include Usance terms defining the period after which the payment for goods is expected to be made.
- Usance Letter of Credit: An Instrument called the Usance Letter of Credit is used in international finance where the bank gives a guarantee on behalf of the buyer that the seller will receive payment after the agreed usance period. This proves very helpful in fostering trust between businesses, boosting global trade.
Importance
Usance is an important term in business and finance as it helps in determining credit periods in international trade. It is particularly crucial in international trade transactions involving bills of exchange as it represents the time period between the date of transaction and the maturity date when the payment is due. This credit period which can range from a few days to a good number of months, allows businesses more time to gather their resources and make payment, thereby improving their liquidity. By providing a specific time frame for payments, usance significantly reduces the risk of default and enhances the financial stability of the business. It also plays an essential role in maintaining smooth and sustained business relationships between various international trading entities.
Explanation
Usance primarily serves as a crucial component in international trade and finance, where it denotes the period between the date a bill of exchange, such as a letter of credit, is issued and the date it has to be paid. This period facilitates the smooth execution of international transactions, often entailing the purchase and sale of goods or services, by providing a buffer period for payment. As financial instruments, Usances, or Trade Usances, as they may be called, crucially underpin the financial solidity and timeliness of global trade transactions, allowing businesses ample time to get their financial logistics in order.The significant purpose of Usance is to offer an extended duration to the importer, buyer, or borrower, which may be needed either due to extended transit times in international trade or the need for time to sell the goods to realize the funds before making the payment. Usance periods can vary greatly depending on the nature of the transaction and the relationships between the parties, ranging from a few days to months. By specifying a Usance period, businesses are able to plan and manage their cash flows better, thereby decreasing potential financial or business risks that may arise due to delay in payment.
Examples
1. Import-Export Trade: In the world of international trade transactions, usance is a common practice. The exporters give buyers (importers) a usance period to pay for the goods, allowing ample time for the importers to sell the goods before payment is due. This waiting period is the usance. For instance, an Indian exporter selling goods to a buyer based in the U.S might give a usance period of 60 days from the bill of lading date.2. Banking Instruments: Usance also applies to banking instruments, such as bills of exchange or letter of credit. These documents often mention a ‘usance period’ which refers to the time period within which the payment is to be made after the receipt or acceptance of goods. For example, a bank may issue a letter of credit with a usance of 90 days, allowing the borrower to use the funds for three months before repayment is required.3. Invoice Financing: In the context of invoice financing, a business sells its accounts receivables (invoices) to a finance company (factor) at a discount but gives a usance period to the factor for full payment, enabling the business to get immediate cash to meet expenses and the factor has a time period to collect the full amount from the clients. This practice is quite common in industries like manufacturing and wholesale.
Frequently Asked Questions(FAQ)
What does the term Usance mean in finance and business?
Usance refers to the allowable period of time, permitted by custom, between the date of a bill or invoice and its payment. It’s the period established between the buyer and seller for payment of a bill of exchange, especially in international trade.
Where is Usance commonly used?
Usance is commonly used in international trade, particularly within the bill of exchange documentation and payment terms for various transactions.
How is Usance determined?
Usance is determined by local business practice or customs in the respective trading country or even can be mandated by the agreement between the buyer and the seller.
What does a Usance Bill denote?
A Usance Bill refers to a bill of exchange with a term/tenor, defining the time (in days) that the drawee has to pay the amount to the drawer. The term can vary from a few days to a few months, depending on the agreement between the parties involved.
What is the effect of Usance on a trade transaction?
The effect of Usance on a trade transaction can be significant. It can impact the cash flow of businesses as the length of usance will determine when a payment is due. It can also affect the cost of finance as longer periods may require businesses to source additional funds to maintain operations.
Does Usance impact the cost of a product or service?
Yes, it can. The interest and financing charges associated with the time allowed for payment can be factored into the pricing of a product or service.
Who benefits from Usance and how?
The buyer benefits from Usance as it provides more time to gather necessary funds to make the payment, allowing for improved cash flow management. The seller, on the other hand, might charge interest for the period, benefiting from the extra income.
What is a ‘Usance period’ and how is it different from ‘sight’?
The Usance period refers to the length of time the buyer has to pay the seller in a Usance Letter of Credit. It’s often calculated in days from the date of shipment or from the date of presentation of documents, depending on the terms of the transaction. In contrast, ‘sight’ means the payment is due immediately upon receiving and verifying the required documentation.
Related Finance Terms
- Letter of Credit: A written commitment issued by a bank that guarantees payment on behalf of a client to a beneficiary, often used in international trade.
- Time Draft: A type of foreign check that is payable at a fixed or determinable future date, often linked with the usance period.
- Trade Finance: The financing of international trade transactions, often involving various instruments such as usance letters of credit.
- Sight Draft: A draft payable on demand by the drawee, contrasted with a time draft or usance draft which allows for a delay in payment.
- Maturity Date: The date on which a loan, bond, or other form of debt becomes due for payment, directly related to the concept of usance in trade finance.
