Deferred Payments guarantees is a guarantee that indicates the postpone payments.
This type of guarantee is required where a buyer wants to buy the capital goods from the seller but cannot pay the whole amount immediately after the delivery of the goods. The amount has to be paid in installments by the importer but in case he becomes the defaulter in the future. To avoid such a situation, the seller can request the importer to obtain a guarantee that the payments in installments will be made. This guarantee of the bank assuring the exporter of the timely installments of payments is called Deferred Payment Guarantee.
Method of Payment
(1) In a contract of deferred payment guarantee, the importer is required to make payments which may last from 1 to 7 years. The payment is done usually on following terms-
* Advance payment of 10% -15% of the price of the goods is made by the buyer.
* Another 10%-15% on receipt of documents under LC.
* The balance amount is paid in instalments spread over a period of 1-7 years, which is secured by Deferred Payment Guarantee.
(2) Before issuing a guarantee, the following terms are mandatory-
* The supply of goods by the seller to the buyer & the seller agreeing to postpone the payment of the price, this being the consideration of the guarantee.
* The payment schedule of both the installment & the interest.
* The unconditional & irrevocable assurance of the bank that it would make payments on the invocation on the guarantee.