Deferred Payment (Deferred Payment Undertaking under a Letter of Credit)
A deferred payment credit is a documentary credit (typically subject to ICC UCP 600) under which the issuing bank (and any confirming bank) undertakes to pay the beneficiary at a future maturity date, provided that the beneficiary makes a complying presentation of the documents required by the credit. The defining feature is that the credit is available “by deferred payment” and does not require presentation of a bill of exchange (draft).
1) Core mechanics
- Trigger: the beneficiary presents the stipulated documents (e.g., transport document, invoice, insurance document, packing list, certificate of origin) within the time limits set by the LC.
- Examination: banks examine documents for compliance with the LC terms and the governing rules (commonly UCP 600). The examination is document-based; banks do not verify the underlying goods.
- Undertaking: if the presentation is complying, the issuing bank’s obligation becomes a commitment to pay on the specified maturity date (the deferred payment undertaking). If the LC is confirmed, the confirming bank has a parallel, independent undertaking to pay at maturity.
2) How maturity is set (determinable future date)
Deferred payment credits typically define maturity using an objectively determinable event date, for example:
- “60 days after bill of lading date”
- “90 days after date of shipment”
- “45 days after invoice date”
- “120 days after acceptance of documents” (less common and should be drafted carefully to avoid ambiguity)
In practice, the maturity date is calculated by the bank based on the date appearing on the relevant document (e.g., the on-board date on the bill of lading).
3) Commercial function
Deferred payment is used to provide the buyer with trade credit (time to sell goods or manage cash flow) while still giving the seller a bank payment undertaking after compliant presentation. It is therefore common in commodity, industrial equipment, and high-volume cross-border trade where payment terms of 30/60/90/120 days are market practice.
4) Risk profile (factual allocation)
Once a complying presentation is made:
- The seller’s primary credit exposure shifts from the buyer to the bank(s) obligated under the LC (issuing bank and, if applicable, confirming bank).
- The seller remains exposed to:
- issuing bank credit risk (probability the bank cannot or will not pay), and
- country/transfer risk in the bank’s jurisdiction (e.g., currency controls, payment moratoria, sovereign actions, sanctions restrictions, or other legal impediments to remittance).
This is why exporters often insist on confirmation by a bank in a lower-risk jurisdiction or require issuance by a bank that meets specified credit criteria.
5) Financing and “discounting” (common market practice)
Although payment is contractually due at maturity, sellers frequently seek early payment by:
- Discounting the deferred payment undertaking (the bank advances funds before maturity at a discount/interest charge), or
- Forfaiting (sale of the receivable on a non-recourse basis, commonly for medium- to longer-tenor trade receivables).
Whether discounting is available depends on the quality of the obligated bank, tenor, documentation, and local regulatory constraints.
Acceptance (Usance / Term Draft; Acceptance Credit under a Letter of Credit)
An acceptance credit is an LC available “by acceptance,” meaning the beneficiary must present a time draft (bill of exchange) together with the other required documents. If the presentation complies, the bank specified in the LC (often the issuing bank or a nominated/confirming bank) accepts the draft, thereby undertaking to pay it at maturity.
1) What “acceptance” means in trade finance
To “accept” a draft is to mark/sign the draft as accepted, which creates a primary payment obligation of the accepting bank to pay the draft amount at maturity. In many jurisdictions, an accepted draft is treated as a negotiable instrument, which can facilitate financing and transfer.
2) Core mechanics
- Presentation: beneficiary presents documents plus a draft drawn as required by the LC (e.g., “Drawn on issuing bank,” payable at X days).
- Examination: bank examines documents for compliance.
- Acceptance: if compliant, the bank accepts the draft and returns/holds it as required by banking practice.
- Payment at maturity: the accepting bank pays the holder of the draft at maturity (often the beneficiary unless discounted/endorsed).
3) How maturity is expressed (precise conventions)
Acceptance credits commonly use:
- “X days sight” (e.g., “30 days sight”): maturity is calculated from the “sight” date—commercially understood as the date the bank receives a complying presentation and accepts the draft (subject to the LC’s terms and the bank’s processing timeline).
- “X days after [event date]” (e.g., “60 days after B/L date”): maturity is computed from the event date shown on the relevant document.
Because “sight” can be operationally sensitive, sophisticated drafting often ties maturity to an objective document date to reduce disputes about calculation.
4) Why acceptances are used (practical rationale)
Acceptance structures are used where parties want:
- a formal instrument evidencing the bank’s promise to pay at maturity (the accepted draft), and/or
- a receivable that may be easier to discount in the market, depending on the accepting bank and jurisdiction.
Deferred Payment vs Acceptance — Clear, Factual Comparison
| Feature | Deferred Payment LC | Acceptance LC |
| Draft Required? | No (Relies on documents only) | Yes (Requires a Time Draft) |
| Legal Basis | Bank's "Deferred Payment Undertaking" | Bank’s "Acceptance" of the Draft |
| Maturity Wording | $X$ days after B/L / Invoice / Shipment | $X$ days after sight or B/L date |
| Pre-payment | Discounting of the bank's undertaking | Discounting of the accepted draft |
| Governing Law | UCP 600 only | UCP 600 + Local Bill of Exchange Laws |
Bank Examiner Note
Under UCP 600, deferred payment and acceptance are equally valid availability types. The determining factor is whether the credit requires a draft. Absence of a draft does not weaken the bank’s payment obligation once a complying presentation is made.
Practical Risk Points and Controls (Common in Professional Use)
Documentary compliance risk (seller risk):
Payment under an LC depends on documents being compliant. Discrepancies can delay payment or allow refusal. Sellers typically mitigate this with pre-checks, document specialists, and aligning LC terms with the sales contract and logistics reality.
Bank selection and confirmation:
The practical strength of either structure depends on the obligated bank’s credit and ability to remit funds. Confirmation is commonly used to reduce bank/country risk.
Sanctions and legal restrictions:
Even where documents comply, payment can be blocked by sanctions laws or regulatory restrictions affecting the bank or currency flows. Parties often address this commercially through bank choice, routing, and compliance screening.
Clarity in maturity calculation:
To avoid disputes, sophisticated credits define maturity based on objective document dates and avoid ambiguous triggers (e.g., undefined “approval,” “acceptance of goods,” or vague “sight” mechanics without context).
In practice, both deferred payment and
acceptance credits are used to provide trade credit while preserving a bank-based payment undertaking after a complying documentary presentation. The commercial difference is primarily documentary: deferred payment credits do not require a draft and create a deferred payment undertaking stated in the credit, while acceptance credits require a time draft that becomes payable at maturity once accepted by the designated bank. In both structures, once documents comply, the beneficiary’s main exposure becomes bank credit risk and the transfer/country risk of the jurisdiction where the obligated bank is located—commonly mitigated by confirmation from a bank in a preferred jurisdiction and by ensuring the LC is drafted with objective maturity triggers and workable document requirements.
Author Bio
Kazi Suhel Tanvir Mahmud – Trade Finance & Letter of Credit Specialist at
Inco-Terms – Trade Finance Insights, is also AVP and Operations Manager at AB Bank, with 24 years of banking experience, including 17 years specializing in
trade finance. He has deep expertise in letters of credit, shipping documentation, and international trade compliance. Throughout his career, he has managed trade finance operations, overseen documentary credits, and ensured adherence to UCP 600 and global banking regulations, supporting exporters, importers, and banking professionals in executing smooth and compliant cross-border transactions.
Last updated: January 02, 2026
