What it means
In trade finance the payment timing is written on the instrument itself. At sight means on demand: once the bank has examined the documents and found them in order, usually within a few working days, it pays.
The alternative is a usance or time draft, which says pay 30, 60 or 90 days after sight or after the shipment date. That choice decides who finances the goods while they sit on a ship or in a warehouse.
Sight terms push the funding cost onto the buyer and strip almost all credit risk out of the transaction for the seller, which is why exporters press for them with new or higher-risk customers. The strength of at-sight terms depends on the instrument carrying them.
A sight letter of credit is a bank's own undertaking, so the seller is relying on a bank rather than on the buyer's willingness to pay. A sight draft under a documentary collection is much weaker, because the bank simply releases the shipping documents against payment, and if the buyer refuses the goods are stranded at the destination port.
At sight does not mean instant. Banks are entitled to a reasonable period to examine documents, and any discrepancy, even a misspelled port or a date one day outside the shipment window, can delay or defeat payment until it is corrected or formally waived.
Because sight terms cost the buyer working capital, they are frequently traded against price. A buyer who agrees to pay at sight can reasonably ask for a discount roughly equal to the interest the seller no longer has to fund.
In practice
Real-world examples.
Example
A machinery exporter selling into a new market insists on a sight letter of credit for the first three shipments. Once a payment history is established, it moves the customer to 60-day usance terms as a commercial concession.
Example
A commodity trader presents documents under a sight credit on a Monday and receives value the following Friday, after the bank queries an inspection certificate date. The delay is normal document examination, not a refusal, but it still shifts the trader's cash forecast by a week.
Example
A furniture importer negotiates a 1% price reduction in return for paying at sight rather than at 90 days. Its bank overdraft costs 7%, so at 90 days the saved finance cost would have been about 1.75%, and the importer concludes the trade is not worth doing.
Formula
Calculation
Cost of a Deferred Payment Period = Invoice Value x Annual Funding Rate x (Days / 360)
An exporter ships $250,000 of packaging machinery. Its own funding cost is 6% a year, and the buyer has asked for 60-day terms instead of payment at sight.
Cost = $250,000 x 0.06 x (60 / 360) = $250,000 x 0.06 x 0.1667 = $2,500
Waiting 60 days therefore costs the exporter $2,500, which is $2,500 / $250,000 = 1.0% of the invoice value. That gives both sides a number to negotiate with. If the buyer offers to pay at sight in exchange for a 0.5% discount, the discount is $250,000 x 0.005 = $1,250, and the exporter still keeps $2,500 - $1,250 = $1,250 of the benefit while receiving the cash two months earlier and carrying less credit risk.Case study
Seen in the real world.
Calder Marine Supplies is an invented company used here to illustrate sight terms. It manufactures deck fittings and had historically sold on 90-day open account, carrying an average receivables balance of around $1.1 million funded on a working capital facility at 7%.
After two customer failures in one year, the finance director moved all new export customers onto sight letters of credit and offered a 1% price concession to compensate them for the tighter terms. Receivables fell sharply, and the annual saving on financing was larger than the revenue given away in discounts, even before allowing for the bad debts avoided.
In this fictional account the change was not painless. Two long-standing customers refused sight terms outright and were kept on open account with tighter credit limits, and the sales team had to learn enough about document requirements to stop shipments being held up by discrepancies. The illustrative point is that payment timing is a commercial lever, not a back-office detail.
Watch out
Common mistakes.
- Reading at sight as same-day payment. Banks take a reasonable examination period, and in practice funds usually arrive several working days after presentation.
- Assuming any sight instrument carries bank risk. Under a documentary collection the bank is only an agent, so the seller is still exposed to the buyer refusing to pay.
- Ignoring document accuracy because the terms are at sight. Discrepancies are the most common reason sight payments stall, and they are entirely within the seller's control.
Questions
People also ask.
What is the difference between at sight and usance?
At sight means payment on presentation of documents, while usance defers payment for a stated number of days after sight or after shipment.
Who benefits most from at-sight terms?
The seller does, because cash arrives immediately and credit risk is minimal, which is why buyers usually expect a price concession in return.
Can at-sight payment be refused?
Yes, if the documents do not comply with the credit the bank can refuse, and payment then depends on the buyer waiving the discrepancy.
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