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What is UPS-letter-of-credit? With Examples:
A UPAS (Usance Payable (At Sight) letter of credit is a financial instrument used in international trade where the payment is deferred until a specified future date (usance period), but it can be drawn upon sight (at sight) upon presentation of compliant documents. In other words, the seller receives payment immediately upon presentation of the required documents, but the buyer's obligation to pay is deferred to a later date.
Here's how it typically works:
Agreement:
The buyer and seller agree to the terms of the transaction, including the usance period (the time between the presentation of documents and the actual payment).
Letter of Credit:
The buyer's bank (issuing bank) issues a UPAS letter of credit in favor of the seller (exporter), specifying the terms and conditions of the transaction, including the usance period and the documents required for payment.
Shipment and Documentation:
The seller ships the goods to the buyer and prepares the necessary shipping documents, such as the bill of lading, commercial invoice, and any other documents required by the letter of credit.
Presentation of Documents:
The seller presents the shipping documents to the buyer's bank (the negotiating bank) within the specified time frame. Upon verification that the documents comply with the terms of the letter of credit, the bank pays the seller immediately.
Deferred Payment:
The buyer's bank sends the documents to the issuing bank, and the buyer's obligation to pay is deferred to the end of the usance period. At the end of the usance period, the buyer's bank debits the buyer's account and pays the issuing bank.
Cost of LC/UPAS LC and Who will pay?
The cost will be paid by the importer:
1.LC issuing Commission
2.LC Transmission Charge
3.Acceptance Commission
4.Reimbursement Charge:
As beneficiary usually claims full payment, reimbursement expenditure will be borne by the applicant (issuing Bank)
5.Interest on funding for UPAS LC
The cost will be borne by the exporter:
1.LC Advising Charge
2.LC Confirmation Charge.
3.Discrepancy Charge
4.Payment Charge
Conclusion
Usance Payment At Sight (UPAS) letter of credit is similar to a traditional usance letter of credit. In this respect, interest is charged additionally for using UPAS LC fund i.e. LC payment made after a particular period of time. Under this 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.