A usance-based supply agreement involves trading goods with deferred payments. This method builds trust between suppliers and buyers. In such contracts, the buyer pays after a specified period. The most common method of payment here is a deferred payment letter of credit (L/C).
This agreement type suits international transactions. It gives the buyer time to sell the goods before payment. Meanwhile, the supplier benefits from guaranteed payment through the bank.
The Role of Deferred Payment Letters of Credit
A deferred payment L/C ensures payment after a fixed term. It eliminates immediate cash flow pressure on the buyer. Moreover, the supplier receives assurance that the bank will pay on time.
Banks issue these L/Cs with clear timelines and conditions. Both parties agree on the payment schedule before shipment. This reduces misunderstanding and strengthens long-term business ties.
Benefits to Both Exporters and Importers
A deferred payment contract protects the exporter from non-payment risks. At the same time, it allows the importer to manage their working capital. Additionally, such agreements encourage smoother cross-border transactions.
For example, the importer can sell the goods before paying the supplier. Therefore, the business continues to operate with less financial strain. In turn, the exporter secures revenue with reduced risk.
Important Elements in Drafting the Agreement
A well-drafted usance-based supply agreement must define payment terms clearly. It should specify delivery timelines and responsibilities. Furthermore, it must include provisions for default and dispute resolution.
Legal professionals usually draft these agreements to prevent legal complications. Clarity and mutual understanding remain critical throughout the process. In conclusion, these contracts create a win-win scenario for both parties.
References
- ICC – International Chamber of Commerce
Website: https://iccwbo.org - Trade Finance Global – Letter of Credit Guide
Website: https://www.tradefinanceglobal.com - Investopedia – Usance L/C Definition
Website: https://www.investopedia.com
Visiting the following pages will be useful:
- Supply Agreement
- Supply Contract
- Deferred Payment Letter of Credit (Usance L/C) – ver. 1
- Deferred Payment Letter of Credit (Usance L/C) – ver. 2
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