I have a question on how to calculate the interest by using LC Usance 90days after BL.
Seller's country has 18% interest per annum whilst buyer's bank interest rate is 10% annum.
Let say amount 10,000usd nett before interest.
How much amount of transaction should be put by the seller to accomodate the interest ?
10,000usd plus interest for 90days at 10% or following 18% ?
After 90days, buyer pays to reimbursing bank at 10,000usd plus 10% or automatically buyer's bank will charge based on plus 18% interest ?
In USANCE LC, it is buyer's responsibility to pay interests at prevailing rate in seller's bank in the seller's country.
That means buyer should pay interest to seller above than invoice value or document value at the time of due date as per tenor? Could you clarify? As per my knowledge usance period is without interest and issuing bank will make the payment to exporter on due date.
The seller will quote a price to the buyer which will include interest at whatever rate the seller feels he can get away with. If he can charge 18% and still be competitive then that is what he will do. If it makes his goods too expensive then he may have to charge less in order to get the sale.
The L/C amount also includes interest and it is not usually broken down on the invoice what the interest element is.
If you are the buyer in this transaction and you don't want to pay the sellers interest rate as it is higher than your domestic rate, you are better off buying at sight and arranging financing with you bank to obtain the 90 days credit; that way you will be paying domestic interest at the cheaper rate.
..... I'ld like to state that domestic rates usually only apply for domestic currency!
When talking about USD-invoices, it would only be fair to calculate on USD-interest rates, which used to bee much lower. Nowadays the USD-interest are very volatile and cannot be predicted exactly, but 18 % p.a. is much to high!
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