Meaning of Deferred Letter of Credit
A deferred Letter of Credit is a type of Letter of Credit in which the bank takes a conditional undertaking to pay the seller on behalf of the buyer on a specified future date after completion of the transaction. The bank makes the payment on the presentment of necessary documents. The date of payment is generally after the shipment of goods.
The concept of a Deferred Letter of Credit is often confused with a Usance Letter of Credit. Let us delve deeper into knowing more about Deferred Payment LC and Usance Letter of Credit.
Deferred Payment vs. Usance Letter of Credit
Usance Letter of Credit is nothing but another name for Deferred Payment Letter of Credit. In the Usance Letter of Credit, the bank pays the beneficiary on a pre-determined date after submitting the necessary documents.
Let us understand the concept of the Deferred Payment Letter of Credit with the help of an example.
Example of Deferred Payment Letter of Credit
Dyna Ltd., a UK-based company, sold goods to Tyra Ltd., an American-based company. Dyna Ltd. expressed in the agreement that they would be able to ship the goods only after one month. Agreeing to the terms, Tyra Ltd., in consultation with its bank, issued a Deferred Payment Letter of Credit. As per the Letter of Credit terms, the bank agreed to pay Dyna Ltd. on the presentation of the Deferred Letter of Credit after 60 days of the shipment date. Therefore, if Dyna Ltd. ships the goods from the UK on 1 July 2017, it can make its claim after 30th August 2017 from the bank with the Deferred Payment Letter of Credit after submitting the necessary documents.
Significance of Deferred Letter of Credit
A deferred Payment Letter of Credit is issued when the buyer and seller are located in different countries. The buyer wants assurance from the seller that his products will be timely dispatched, and the seller wants assurance from the buyer that he will pay timely for the products shipped by him. A deferred Letter of Credit solves all such problems. In the first stage, the buyer’s bank issues a Letter of Credit in favor of the seller’s name. In the next stage, the buyer’s bank sends the Letter of Credit to the seller’s bank to negotiate. Now the negotiating bank gives its guarantee and confirmation to the Letter of Credit upon the request of the seller.
After the negotiation, the seller ships the goods to the buyer and presents the necessary documents to the negotiating bank. After going through the documents, the negotiating bank sends them to the bank issuing the Letter of Credit.
Since it is a Deferred Payment, the payment can be delayed for a period ranging from 30 to 180 days. The exporter holding the draft shall receive payment from the bank after the stipulated period of the deferred payment is over.
Benefits of Deferred Payment Letter of Credit
Let us have a look at some of the benefits:
- It builds trust among the buyers and sellers indulging in an international transaction
- It allows the buyer to import goods at a relatively lower finance cost
- The seller is assured of the payment of goods
- It promotes international trade among different countries
A deferred Payment Letter of Credit is an important tool for businesses indulging in international trade. Apart from benefits to the business, it acts as a big boost for the economy as well. It promotes the export and import of goods leading to higher trade relations among different countries. A deferred Payment Letter of Credit assures both parties to the agreement that there will be no fraud or injustice to any party.