Introduction

A Deferred Letter of Credit (LC) is a trade finance instrument that allows the beneficiary to receive payment at a later agreed date after shipment or document presentation, rather than immediately.

Understanding the MT700 message format, key fields, and payment instructions is essential for exporters, importers, and banks to ensure smooth execution of deferred payment transactions.

I. Overview of Deferred LCs

• Definition: A deferred LC allows the beneficiary to present compliant documents and receive payment at a specified future maturity date.

• Key Feature: The payment is guaranteed by the issuing bank, but disbursed at a later date.

• Use Case: Commonly used in export trade, providing the importer with short-term financing while assuring the exporter of payment.

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II. MT700 Structure for Deferred LCs

The MT700 is the SWIFT message format used to issue documentary credits. Key fields for deferred LCs include:

1. Field 20 – Documentary Credit Number

   • Unique identifier for the LC transaction.

2. Field 31C – Date of Issue

   • Date when the LC is created.

3. Field 40A – Form of Documentary Credit

   • Must specify “Irrevocable”, indicating the LC cannot be canceled without consent.

4. Field 42P – Deferred Payment Terms

   • Specifies payment tenor or maturity date after document presentation.

5. Field 43P – Place of Deferred Payment

   • Indicates where and by which bank payment will be made.

6. Field 47A – Additional Conditions

   • Contains instructions regarding shipment, partial shipments, or other LC terms.

7. Field 44A / 44C – Shipment Details

   • Port of loading, final destination, and latest shipment date.

8. Field 32B – Currency and Amount

   • Total LC value and payment currency.

Example: An exporter ships goods on 1st October under a deferred LC with payment due 60 days after presentation. Field 42P would specify the 60-day tenor.

Keywords: MT700 fields, deferred payment, SWIFT message format.

III. Payment Instructions and Maturity

• Payment Instruction: Beneficiary presents compliant shipping and documentary evidence to the nominated bank.

• Maturity Date: Payment is made on the agreed deferred date, e.g., 30, 60, or 90 days after presentation.

• Partial Payments: Allowed if specified in the LC terms; each tranche may have separate maturity.

Example: An importer receives goods on 10th October, but payment is deferred to 10th December, giving them temporary liquidity for business operations.

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IV. Advantages of Deferred LCs

1. Improved Buyer Liquidity – The importer can manage cash flow while ensuring supplier payment.

2. Export Assurance – The exporter receives a bank guarantee for payment at a future date.

3. Facilitates Trade – Supports international trade where immediate payment may be challenging.

4. Customizable Payment Tenor – Payment dates can be negotiated based on trade agreements.

Example: A trading company in Europe can import raw materials from Asia and pay 90 days later, maintaining working capital for production.

V. Risks and Compliance Considerations

• Issuer Risk: Exporter relies on the issuing bank’s solvency for deferred payment.

• Documentary Compliance: Delays or discrepancies in shipping documents can postpone payment.

• Currency Risk: Deferred payments may be affected by exchange rate fluctuations.

Mitigation:

• Ensure accurate MT700 completion, especially Field 42P and Field 47A.

• Use confirmed deferred LCs to reduce issuer risk.

• Monitor compliance with UCP 600 rules.

Keywords: risk management, documentary compliance, UCP 600 compliance.

VI. Best Practices

1. Clearly define deferred payment tenor in Field 42P.

2. Specify place and method of payment in Field 43P.

3. Ensure all shipping and documentary requirements are precise and unambiguous.

4. Regularly communicate with the nominated and issuing banks to avoid delays.

5. Consider bank confirmation for additional security for the beneficiary.

Example: An exporter uses a 60-day deferred LC with confirmation by a local bank to secure payment in case the issuing bank faces liquidity issues.

VII. Conclusion

Deferred LCs provide a balance between trade facilitation and financing flexibility, allowing importers to manage cash flow while exporters receive guaranteed payment at a future date.

By understanding MT700 structure, key fields like 42P and 43P, and compliance requirements, businesses can execute deferred payment transactions efficiently, minimizing risk and supporting international trade growth.

FAQ: Deferred Letters of Credit (LCs)

Q1 — What is a deferred LC?
A deferred LC allows payment to the beneficiary at a future maturity date after document presentation.

Q2 — Which MT700 field specifies the deferred payment?
Field 42P indicates the payment tenor or maturity date.

Q3 — Can deferred LCs be partially paid?
Yes, partial payments are allowed if specified in the LC terms.

Q4 — What are the risks for exporters?
Risks include issuer default, documentary discrepancies, and currency fluctuations.

Q5 — How does UCP 600 govern deferred LCs?
UCP 600 provides rules for documentary compliance, payment obligations, and LC amendments, including deferred payments.

Q6 — Is bank confirmation recommended for deferred LCs?
Yes, confirmed deferred LCs reduce issuer risk and guarantee payment to the beneficiary.

Q7 — What is the role of Field 43P?
Field 43P specifies the place and bank where deferred payment will be made.