Deferred Letter of Credit — Article 2: Structuring, Confirmation & Discounting

A practical, bank-grade playbook for structuring Deferred LCs: how to obtain confirmation, enable exporter discounting, allocate risks, draft robust LC clauses, and negotiate tenor, fees and collateral with issuing/confirming banks.

Quick takeaway:

Deferred LCs are powerful but require careful drafting and coordination between buyer, seller, issuing bank and (where relevant) a confirming bank or discounter. The right structure accelerates acceptance, reduces cost, and unlocks early exporter liquidity.

1. Choosing the right Deferred LC structure

Selecting the appropriate structure depends on counterparty risk, tenor, sector and whether exporters need early payment. Below are practical options and when to select them.

Structure	When to use	Pros	Cons
Unconfirmed Deferred LC	Low-risk issuers; strong buyer credit	Lower fees; simpler	Seller bears issuer/country risk
Confirmed Deferred LC	High-risk issuing bank or country	Seller guaranteed by confirming bank	Higher confirmation fees; negotiation needed
Discountable Deferred LC	Exporter needs early cash	Exporter receives funds before maturity	Discounting costs; requires discounter acceptance
Transferable Deferred LC	Intermediaries / traders	Pass-through to suppliers	More complex wording; bank approval needed
Installment Deferred LC	Project milestones / equipment	Aligns payments with delivery	Complex schedule; higher amendment risk

2. Confirmation — why and how

Why confirm? A confirming bank adds its own unconditional commitment to pay at maturity (subject to document compliance), effectively removing the beneficiary’s exposure to the issuing bank or country risk. Confirmation is common for long tenors or unfamiliar issuing banks.

How to obtain confirmation

• Negotiate confirmation in the application: the applicant (buyer) must request confirmation and agree who bears the confirmation fee.
• Provide financings & issuer due diligence: confirming banks will require issuer financials, sovereign risk assessment, and governance documents.
• Agree confirmation pricing & collateral: depending on tenor, confirming bank may request fees, margin or standby facilities.
• Confirm via SWIFT MT700 field: confirmation instructions reflected in the LC text and SWIFT routing.

3. Discounting: unlocking exporter liquidity

Exporters commonly request early payment against a Deferred LC through discounting or forfaiting. This converts a future receivable into immediate cash in exchange for a fee. For discounting to work smoothly, the LC must contain language acceptable to discounters.

Key discounting features banks/discounters require

• Clear payment date and maturity (explicit tenor).
• No documentary conditions that contradict discounting (e.g., conditional tolerances).
• Unambiguous beneficiary and assignment/transfer provisions if forfaiting.
• Confirming bank guarantee improves discounting pricing and acceptance.

Discounting workflow

1. Exporter presents compliant documents to nominated/confirming bank.
2. Bank/Discounter verifies LC terms allow discounting; assesses issuer risk.
3. Discounter offers a discount rate and advance amount (usually net of fees).
4. Exporter accepts; funds remitted; remainder payable at maturity (to discounter or bank).

4. Drafting robust LC clauses — practical templates

Below are sample clauses to include in the LC application/terms to facilitate confirmation and discounting. Customize with legal counsel and your bank’s trade desk.

Applicant requests that this Letter of Credit be confirmed by a first-class international bank acceptable to the Beneficiary. All confirmation charges and fees shall be borne by the Applicant unless otherwise agreed in writing.

Beneficiary may assign, transfer or discount the proceeds of this Letter of Credit in whole or in part. Any such assignment shall not prejudice the rights of the Issuing Bank or the Confirming Bank. The Issuing Bank shall accept notice of assignment provided by the Beneficiary's bank and shall cooperate in effecting payment to the assignee subject to presentation of compliant documents.

Payment under this Letter of Credit shall be made at maturity, which is defined as 90 days after the date of presentation of complying documents, but in no event later than [DATE]. Payment shall be made in [CURRENCY] to the Beneficiary or its order.

5. Negotiating fees, margins & collateral

Issuance and confirmation fees depend on tenor, bank risk appetite and corridor. Practical negotiation tips:

• Compare multiple confirming banks — pricing can vary materially.
• Negotiate shared fee structures: sometimes the beneficiary pays discounting fees while applicant covers confirmation.
• For long tenors, expect confirming banks to ask for additional security (cash collateral, standby, or margin accounts).
• Consider partial confirmation: confirm only a portion of the LC amount to balance cost and risk transfer.

6. Compliance & documentation — avoid common pitfalls

Rigorous document control is essential. Common causes of discrepancy and delay include:

• Mismatched descriptions (goods, quantities, grades)
• Incorrect dates (shipment, B/L, invoice)
• Non-conforming certificates (inspection, origin, insurance)
• Unclear payment instructions or transfer terms

Mitigation: run pre-shipment document checks, use a document checklist, and request sight-testing of the draft LC text by the nominated bank.

7. Timelines & escalation matrix

Typical milestones and internal SLA suggestions:

Milestone	Target SLA	Responsible
Draft LC request to issuing bank	0–2 business days	Applicant / Bank Relationship Manager
Issuing bank internal credit & compliance	1–4 business days	Issuing bank KYC / Credit
Confirmation negotiation	1–5 business days	Beneficiary / Confirming bank
SWIFT MT700 issuance	24–72 hours after approval	Issuing bank
Document presentation & bank check	24–72 hours	Nominated / Issuing / Confirming bank
Discounting decision	24–72 hours	Discounter / Beneficiary

8. Sector considerations — quick notes

• Agriculture: include phytosanitary and quality certificates; seasonality may affect tenor.
• Energy & Commodities: longer tenors and confirmation common; sanctions checks essential.
• Construction: milestone-based installments; engineer’s certificate language critical.
• Technology: include export-control / licensing clauses and IP-sensitive routing.

9. Sample negotiation checklist — for the beneficiary

• Insist on written confirmation that LC text allows discounting/assignment.
• Request a draft MT700 for pre-check with your nominated bank.
• Ask for a list of acceptable confirming banks and their indicative fees.
• Clarify who pays issuance, confirmation and discounting fees in writing.
• Obtain timelines for bank credit and compliance checks in writing.

10 Frequently Asked Questions — Structuring & Discounting

1. Can a Deferred LC be discounted if unconfirmed?
   Yes, but discounting unconfirmed LCs typically carries higher pricing due to issuer risk. Confirmed LCs yield better discount rates.
2. Who normally pays confirmation fees?
   Confirmation fees are negotiable. In practice, applicants often pay, but beneficiaries or buyers can share costs depending on bargaining power.
3. What collateral might a confirming bank require?
   Cash margin, standby facilities, parent company guarantees or other security — especially for long tenors or higher-risk issuers.
4. How to ensure the LC is discountable?
   Include explicit assignment/discounting language in the LC, secure confirming bank support, and provide clean documentation protocols.
5. Can discounting be partial?
   Yes. Discounter can advance a percentage of the invoice value and retain the remainder until maturity.
6. What happens if the issuer defaults before maturity?
   If confirmed, the confirming bank pays. If unconfirmed, the beneficiary becomes a creditor of the issuer and must pursue recovery under applicable law.
7. Is forfaiting different from discounting?
   Forfaiting often implies non-recourse purchase of receivables and is used for medium/long-term tenors, whereas discounting may be with recourse and for shorter tenors.
8. Can confirmation be added after issuance?
   Yes, via an amendment, but confirming banks may re-assess terms and request additional fees or collateral.
9. Do confirming banks require issuer financials?
   Yes — confirming banks perform credit assessment and will request financials, sovereign risk data and governance documents.
10. How to speed up discounting approval?
    Pre-arrange facility terms with discounters, provide issuer and transaction documents in advance, and secure confirming bank comfort where possible.

Practical next steps — a beneficiary playbook

1. Request a draft MT700 from the applicant and run it past your nominated bank.
2. Confirm assignment/discounting language is included and acceptable to discounters.
3. Obtain list of acceptable confirming banks and indicative fees.
4. Pre-upload your KYC and document checklist to speed verification.
5. Negotiate fee allocation and get written confirmation in the supply contract.