What Is a Deferred Payment Letter of Credit?

A deferred payment letter of credit is a guarantee from an importer's bank to an exporter; it assures the seller of payment at a later date after the goods are dispatched to the buyer. The deferral period typically varies from 30 to 180 days after the seller ships the goods.

An exporter should submit the necessary documents to his bank soon after dispatching the goods in order to avoid delaying the start of the deferral period. An exporter must agree with the importer on the interest rate to be paid by the importer for deferring the payment. An importer's bank typically charges a letter of credit fee, a commitment and management fee, and a margin for the deferred payment letter of credit. In some cases, an exporter must pay a premium to an export credit agency to provide a guarantee on the deferred payment letter of credit, if the bank requires such a guarantee.

The deferral period may allow the buyer to receive and resell the goods before the payment is due. An exporter's bank may discount the deferred letter of payment in order to pay the exporter before the deferral period is over. Once the payment is due, the exporter's bank collects the full amount from the importer.