A 120-day Deferred Letter of Credit (LC) means that the payment will be made to the seller 120 days after the shipment or after the submission of the required documents which is depending on the terms agreed upon. Here’s the details of how it works:
Key Points:
- Deferred Payment Period: For 120 days the payment always be deferred, which is the time the seller has to look for before receiving the funds from the buyer. For example, if the documents are submitted on March 1st, then the payment will be made on June 29th (120 days later).
- Documentary Requirements: When the seller ships the goods and submits the necessary documents like the bill of lading, commercial invoice, certificate of origin etc. to the bank then the bank checks all the documents submitted, and if everything is ok, then it holds over for the 120-day period to pass before making the payment to the seller.
- Payment Terms: The buyer may be accepted to take control of the goods upon shipment or submission of documents, but the seller will not be paid until the 120-day period passes off.
- Bank’s Role: The issuing bank from the buyer’s side ensures as a guarantee to the seller, stating that it will pay the amount after the 120 days, assuming the documents are correct and in permission with the terms of the LC.
- Interest: Sometimes, the seller can bargain for the interest on the deferred payment when the payment is delayed. This interest would be gathered to the final amount which will be paid after the 120 days.
Example:
- Shipment Date: April 1st 2024
- Submission of Documents: April 1st 2024
- Payment Due Date: 120 days from April 1st 2024 → July 29th 2024
- Payment to Seller: The seller will receive the payment on July 29th 2024 when the 120-day period is fulfilled.
This type of LC is generally used in business deals where the buyer takes some time to gather funds or wants more time for cash flow management.
