Deferred payment credits
Unconfirmed or confirmed
Under a deferred payment credit, the issuing bank and any confirming bank undertake to effect payment at a specified later date (for instance, 90 days after the date of shipment) subject to the presentation of the stipulated documents within the expiry date of the documentary credit. As such, the maturity date must be ascertainable in accordance with the tenor stated in the credit. The exporter thus grants the importer time to pay.
The credit is available by deferred payment.
In the case of unconfirmed credits, only the issuing bank is liable to the exporter for payment on the due date. Consequently, there is a long period during which the credit and country risk are not covered.
In the case of confirmed credits, the exporter receives such a payment undertaking from both the issuing and the confirming bank.
The advantages of unconfirmed deferred payment credits:
The importer is not required to effect payment until the due date. If necessary, the goods can be re-sold during the payment period and the proceeds of the sale used to settle the documentary credit.
More cost-effective than a confirmed credit.
The additional advantages of confirmed deferred payment credits:
The additional advantages of confirmed deferred payment credits: this form of credit offers the exporter extensive security as the credit risk is extremely limited - UBS, for instance, is liable to the exporter - and the country risk is eliminated altogether.
The credit is available with the confirming bank, which means that the exporter receives the payment undertaking from the confirming bank (UBS) as soon as the stipulated documents have been presented if they constitute a complying presentation.
The risks associated with postage - late delivery or loss - for the exporter are largely eliminated as the credit is deemed to have been utilized once the complying documents have been presented to the confirming bank.
Under certain circumstances, the exporter can benefit from the prepayment of the credit subject to an interest charge once the complying documents have been presented.
The disadvantages of unconfirmed deferred payment credits:
Under certain circumstances, there is a risk that the exporter will not be paid in the event of problems in the country in which the issuing bank is based or credit-related difficulties on the part of the issuing bank.
The exporter must bear the financing costs during the payment period.
Compared with payment against open account or documentary collection, the administrative costs are higher.
The disadvantage of confirmed deferred payment credits:
- This is a more expensive option than an unconfirmed credit because the confirming bank effectively guarantees the payment and thus charges a commitment fee for the risk it assumes.
In contrast to acceptance credits, in this instance there is no liability on a bill. Furthermore, as a general rule no time draft should be necessary for the purposes of the credit. Should the terms of the credit nevertheless require one, drawn on the buyer, this is treated as an additional document.
Even if a documentary credit does not include a confirmation instruction, the nominated bank can in certain cases enter into a special agreement with the exporter in the form of a so-called silent confirmation. Such an agreement will set out the risks covered by the nominated bank.
Unconfirmed deferred payment credits are only appropriate if the exporter is able to accurately assess and accept the country risk and the credit risk on the part of the issuing bank. Furthermore, he should be in a position to await payment until the due date and not require pre-financing of the payment period.
Should the exporter require greater security and/or financing of the payment period, however, he should request a confirmed acceptance or negotiation credit. We recommend that the exporter contact us before entering into any major deals in order to establish whether or not UBS would be willing to issue such a confirmation.
We recommend that the exporter incorporate the following payment clause in the basic agreement.
Unconfirmed credits: " against documentary credit, to be advised through UBS AG, Trade Finance, P.O. Box, CH-8098 Zurich (SWIFT UBSWCHZH80A), in our favour, available until (= date) with the advising bank, by deferred payment at ... days after the date of shipment, against presentation of the stipulated documents." The exporter awaits payment until the due date.
Confirmed credits: " against documentary credit to be issued by a prime bank and confirmed by UBS AG, Trade Finance, P.O. Box, CH-8098 Zurich (SWIFT UBSWCHZH80A), in our favour, available until (= date) with the confirming bank, by deferred payment at ... days after the date of shipment against presentation of the stipulated documents." In certain cases the exporter can arrange for a prepayment on the payment subject to deduction of an interest charge
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