Various Types of Deferred Letters of Credit (LC)

Deferred Letters of Credit (LC) arises in various types based on specific payment terms and conditions. Here are the main types:

1. Usance Letter of Credit (At Sight LC with a Deferred Payment System):
   
   • Usance LCs are the most common form of Deferred LCs. In this type, the importer or buyer’s bank agrees to pay to the seller an individualized number of days after the submission of the shipping documents e.g., 30, 60, 90, 120 or 300 days).
   • Payment Delay: The seller must look forward to the agreement in a  period after the document submission before the receiving payment.
   • Example: A 90-day usance LC means the seller gets paid 90 days after submitting the necessary documents to the bank.
2. Red Clause Letter of Credit (with Deferred Payment Terms):
   
   • A Red Clause LC permits the seller to receive an advance payment from the buyer’s bank before shipment of the goods.
   • The deferred payment prominence may still engage for the balance after the shipment is made and documents are presented. This helps the supplier by providing an early payment for a portion of the goods, while the rest is deferred.
   • Red Clause is basically combined with deferred terms when the seller requires partial advance payment.
3. Revolving Letter of Credit (with Deferred Terms):
   
   • A Revolving LC can be used for periodical transactions between the buyer and the seller.
   • If it is a deferred revolving LC, then the payments for every shipment are delayed according to the agreed-upon period.
   • The credit amount can be renewed or restocked automatically after each and every transaction.
4. Transferable Letter of Credit (with Deferred Payment):
   
   • In a Transferable LC, the seller (the first beneficiary) can transfer few or all of the payment rights to a third party (the second beneficiary).
   • If the LC has deferred payment terms, then the second beneficiary party will also have to look for the deferred payment period after presenting the documents.
5. Back-to-Back Letter of Credit (with Deferred Payment):
   
   • A Back-to-Back LC engaged the two letters of credit: the first one between the buyer and the first seller, and the second one between the first seller and the final supplier.
   • If the first seller has deferred payment terms in their LC then the second supplier will also be subject to those same deferred terms.
6. Confirmed Deferred Letter of Credit:
   
   • A Confirmed LC engages a confirmation from a second bank usually in the seller’s country that guarantees the payment in case the buyer’s bank lays down to pay.
   • If deferred, then the payment will be made according to the agreed-upon term, but the confirmation gives to the seller extra security.
7. Standby Letter of Credit (with Deferred Payment):
   
   • A Standby LC is always used as a backup or guarantee in case the buyer lays down to fulfill their responsibilities.
   • If the LC is deferred, then the seller will receive payment at another date once they make a demand under the standby credit.

These various types of Deferred LCs provide the flexibility depending on the buyer’s and seller’s favour and the nature of the trade agreement. The choice of the type largely depends on the agreed terms between the buyer and seller, the level of risk, and the timing of the transactions.