Mr Old Man Payment Q&A WHEN A DEPOSIT IS REQUIRED TO SECURE PAYMENT UNDER A USANCE LC By Mr Old Man Posted on 1 day ago 3 min read 0 0 18 Share on Facebook Share on Twitter Share on Google+ Share on Reddit Share on Pinterest Share on Linkedin Share on Tumblr QUESTION Hi Mr. Old Man, I’ve been trying to find this information but couldn’t get a clear answer on Google. When an importer requests their bank to issue a usance LC, does the bank lock up the amount in his account until the LC reaches maturity? Thank you. Tengku —— ANSWER Hi, Whether a deposit is required for the issuance of a sight LC or a usance (deferred payment) LC largely depends on the applicant’s financial strength and the quality of their relationship with the issuing bank. If the applicant is a financially strong company with a solid and reputable credit history, the bank may waive the deposit requirement. However, if the applicant is a newly established or smaller business with limited financial capacity or a short credit track record, the bank may require a deposit ranging from 30% to even 100% of the LC value as collateral to secure the payment obligation. In practice, importers often use deferred payment LCs with the intention of paying the bank later, using cash flows generated from their own buyers. Because of this, it’s uncommon for companies to have—or be willing to freeze—100% of the LC value in a deposit account for a deferred payment LC. Holding such capital idle in a non-interest-bearing deposit is inefficient, especially considering that deferred payment LCs typically result in higher product prices compared to sight LCs, due to the seller bearing the risk of delayed payment. Given your company’s situation, here are a few possible solutions: Negotiate with your bank to lower the deposit requirement—ideally down to 20% or the minimum they can accept. Explore other banks that may be willing to issue a deferred payment LC with more favorable terms. If a 100% deposit is unavoidable, consider negotiating with the exporter to switch from a deferred payment LC to a sight LC. Since payment would be made immediately upon presentation of documents, you could ask for a price reduction in return. Taking one of these steps could significantly improve your company’s cash flow management and reduce the overall transaction cost. Best regards, Mr. Old Man