Under a UPAS credit the exporter is paid at sight and the buyer gets its term, so the discount does not disappear: it moves to the applicant.
In a usance payable at sight (UPAS) credit the exporter is paid the face value at presentation and the buyer repays at the end of the usance period, so the buyer carries the cost: the bank's discount interest plus a usance commission. On an illustrative 4,200,000 credit with 120 days of usance at a 6.9 per cent discount and a 1.2 per cent commission, the buyer pays 113,400, an all-in 8.10 per cent a year, against 154,000 for the same 120 days on an 11.0 per cent local loan.
Worked in full in Trade Finance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A UPAS credit is a usance credit with a funding line built in. The beneficiary sees a sight credit; the applicant sees a term credit; a bank in between, usually the nominated or confirming bank, pays at sight and waits for the applicant. It is common where buyers borrow expensively at home and their banks have access to cheaper dollar or euro funding abroad. The question for each party is what the structure costs them, and against what.
The order is the one followed through the book: 4,200,000 of process instrumentation, here shipped under a credit with 120 days of usance. The discount rate is the book's confirming bank rate; the usance commission and the buyer's local borrowing rate are illustrative.
| Input | Value |
|---|---|
| Credit amount (face) | 4,200,000 |
| Usance period | 120 days |
| Discount rate of the funding bank, actual/360 | 6.9% |
| Usance (deferred payment) commission, a year | 1.2% |
| Buyer's local borrowing rate | 11.0% |
| Exporter's cost of goods / own cost of funds | 3,423,000 / 8.4% |
1. What the exporter receives. The full 4,200,000 at presentation, less only its own fees as beneficiary. Nothing is discounted from its proceeds: the credit states that discount and acceptance charges are for the applicant's account.
2. What the buyer pays. The face at maturity, plus the bank's charges for funding it for 120 days:
Discount interest = 4,200,000 × 6.9% × 120 ÷ 360 = 96,600
Usance commission = 4,200,000 × 1.2% × 120 ÷ 360 = 16,800
Total = 113,400, or 2.70% of the face
All-in rate = 113,400 ÷ 4,200,000 × 360 ÷ 120 = 8.10% a year
Excel: =4200000*(6.9%+1.2%)*120/360
Where the bank collects its interest from the applicant at the start rather than at maturity, the buyer is in effect borrowing 4,086,600 net, and the same charges cost 8.32 per cent a year. Ask which convention the issuing bank applies before comparing quotes.
3. Against the buyer's alternative. Without UPAS the buyer either pays a sight credit with money borrowed locally, or asks the exporter for 120-day terms. Funded locally at 11.0 per cent, 120 days cost 4,200,000 × 11.0% × 120 ÷ 360 = 154,000. UPAS saves the buyer 40,600, and remains cheaper as long as the local rate is above 8.10 per cent.
| Structure | Buyer pays | Exporter finances after presentation |
|---|---|---|
| Sight credit, buyer borrows locally at 11.0% | 154,000 | 0 |
| UPAS credit, discount for applicant's account | 113,400 | 0 |
| Usance credit, exporter holds to maturity | 0 | 95,844 |
| Usance credit, exporter discounts at 6.9% | 0 | 96,600 |
The table shows where the money goes. On an ordinary usance credit the exporter carries the 120 days, either on its own facility, 3,423,000 × 8.4% × 120 ÷ 360 = 95,844, or by discounting the accepted draft for 96,600. Under UPAS that cost reappears, almost to the unit, on the buyer's side. The structure does not make the money cheaper; it decides who borrows it, and lets the party with access to the cheaper rate do so.
That also tells the exporter how to price. If the buyer offers UPAS, the right quotation is the sight price, because the exporter finances nothing beyond presentation. If the buyer instead wants an ordinary usance credit, the exporter must recover 95,844 or more in price, and the comparison becomes the one set out in how much to charge for extended payment terms.
| Usance, days | Discount | Commission | UPAS total | % of face | Local loan | UPAS saves |
|---|---|---|---|---|---|---|
| 60 | 48,300 | 8,400 | 56,700 | 1.35% | 77,000 | 20,300 |
| 90 | 72,450 | 12,600 | 85,050 | 2.02% | 115,500 | 30,450 |
| 120 | 96,600 | 16,800 | 113,400 | 2.70% | 154,000 | 40,600 |
| 180 | 144,900 | 25,200 | 170,100 | 4.05% | 231,000 | 60,900 |
The saving is proportional to the tenor because the rate gap, 2.90 percentage points, is constant. The discount rate matters more than the commission: at 5.5 per cent the 120-day UPAS costs 93,800, 6.70 per cent all in; at 8.5 per cent it costs 135,800, 9.70 per cent, and the saving over the local loan shrinks to 18,200.
Quoting the discount rate as the cost. The buyer's cost is 6.9 plus 1.2 per cent, 8.1 per cent, before the issuing bank's own opening and amendment fees, which it pays on a sight credit too. A UPAS line that looks 4.1 points cheaper than the local bank is 2.90 points cheaper once the commission is in.
Confusing a discount with a yield. When an exporter discounts a draft itself, the 6.9 per cent is taken on the face and the proceeds are 4,103,400, so the true rate on the money received is 7.06 per cent. Under UPAS with interest collected at maturity, the buyer pays simple interest on the face and there is no such gap; with interest collected at sight there is.
A UPAS credit still uses the buyer's letter of credit line at its bank for the whole usance period. It saves interest, not credit capacity.
The sight credit, the usance credit and the discount for the applicant's account are priced on this order in the free workbook for this case. Why a lower discount rate is not always cheaper money is worked in is a 6.90 per cent discount cheaper than an 8.40 per cent facility.
The applicant, the buyer. The beneficiary presents compliant documents and is paid the full face at sight; the discounting bank funds the payment and recovers the face plus discount interest from the applicant at maturity. On an illustrative 4,200,000 credit with 120 days of usance at 6.9 per cent, that interest is 96,600, plus 16,800 of usance commission.
When the discounting bank's rate is below the buyer's own borrowing cost, yes. At 6.9 per cent discount plus 1.2 per cent commission, UPAS costs 8.10 per cent a year. A buyer whose local bank charges 11.0 per cent would pay 154,000 for the same 120 days, 40,600 more, so any local rate above 8.10 per cent makes UPAS the cheaper funding.
Because they are paid at presentation and finance nothing after shipment. Holding a 120-day usance credit to maturity would cost the exporter 95,844 of its own funding on 3,423,000 of cost at 8.4 per cent, and discounting it itself would cost 96,600. Under UPAS the discount is for the applicant's account, so the exporter's price can be its sight price.
This article is one calculation from Trade Finance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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