A 300-day Deferred Letter of Credit (LC) which operates similarly to a shorter-term deferred LC, but it is an extended payment delay of 300 days. This means when the seller submits the required shipping documents to the bank, the bank will give the payment to the seller 300 days later, where all terms and conditions of the LC are fulfilled.
Key Points of a 300-day Deferred LC:
- Deferred Payment Period: In this payment period the payment to the seller will occur 300 days after the shipment or after the submission of the required documents which is depending on the agreed-upon terms & conditions.
- For example, if the shipment is done and documents are submitted on April 1st, 2024 the payment will be made 300 days later, on January 26th, 2025 of the following year.
- Document Submission: The seller ships the goods and presents the required documents (e.g., invoice, bill of lading, packing list, etc.) to the bank. These documents serve as proof that the seller has fulfilled their obligations under the contract.
- Payment Terms: The buyer gets the goods and has possession of them, but the seller must wait for 300 days before receiving payment. The 300 days will be provided to the buyer with a specific time of period to arrange funds or manage cash flow.
- Bank’s Role: The bank takes guarantee of payment to the seller after the 300-day period, when the necessary documents are submitted. The buyer’s bank is always responsible for making the payment on behalf of the buyer if the agreed period has expired.
- Interest: The interest is depending on the agreement, where the seller might negotiate interest on the deferred payment amount, as they will be waiting a long time to receive payment.
Example Scenario:
- Shipment Date: April 1st 2024
- Presentation of Documents: April 1st 2024
- Payment Due Date: 300 days after April 1st → January 26th 2025 of the following year
- Payment to Seller: The seller will receive payment within or on January 26th 2025.
When is a 300-day LC used?
- This type of LC is generally used in higher industries where high levels of value goods are involved or where the buyer needs a longer period to arrange funds or manage their cash flow, like machinery companies, construction companies, or large-scale projects.
It’s important for both parties to clearly understand the terms & conditions, because here the long deferral period can lead to more significant risk for the seller, while the buyer benefits from an extended payment period.
