How to use deferred payment to bridge short-term cash shortages
A deferred payment is a payment extension granted to the debtor by the creditor. Among other things, it can be used to bridge short-term cash shortages. We show you how deferred payments work and how they are used in practice.
Deferred payments are an agreement between a debtor (e.g. customer) and a creditor (e.g. seller or supplier) that entitles them to pay an invoice at a later date.
Such an agreement makes sense if the debtor has a cash shortage and cannot pay his invoice on time. Instead of being in default and having to pay default interest, a deferred payment is a regulated default with which the creditor agrees.
Accordingly, the creditor grants the debtor an interest-free credit and agrees with him a new payment date by which the payment must be made.
There are different types of deferred payments that have different purposes:
- Buy now, pay later: payment models offered by payment service providers, where the service providers pay the seller immediately
- Payment plans: Sellers use a payment plan that allows customers to pay for the purchased goods at a later date or in monthly instalments.
Defer tax liability into the next tax period and get more cash for a short time: Buyers can agree a deferred payment with a seller to defer the debt due into the next tax year, leaving them with more cash available.
Buy now, pay later is the best known example of deferred payments. If a customer buys goods worth, say, £600 from an online shop and uses the buy now, pay later payment method, the seller receives from the payment service provider the £600 immediately. After a certain period of time (often after 3 months), the customer must then pay the £600 to the payment service provider.
Payment plans are very similar to the buy now, pay later model. The only difference is that the seller sets the conditions himself and does not use a payment service provider. For example, the seller can offer his customers to pay for the purchased goods only after six months.
If a customer then buys £600 worth of goods, he only pays for them after these six months have passed. The seller must therefore wait that long for this payment. In addition, an instalment payment can also be agreed, for example that the buyer pays an interest-free instalment of £100 over six months.
Deferred payments are often used to have more cash available at short notice. For example, if a company purchases a large quantity of goods from its supplier at the end of the business year, it can agree a deferred payment with the supplier.
In this case, the supplier grants a deferral of the payment, for example instead of 01.12.2022 01.01.2023. The payment then falls into the next tax period, which means that the company still has more cash available in the current one, for example to pay its employees Christmas bonuses.
A deferred payment is in any case better than an unregulated late payment, as the debtor does not have to expect additional interest payments or, in the worst case, even legal consequences. However, deferred payments should not become the rule for companies, as the debt will have to be paid sooner or later.
If you agree to a deferred payment, you must make sure that you have enough cash available on the future payment date to settle the debt, otherwise you will be in an unregulated payment default.
On the consumer side, deferred payments can tempt people to buy goods that they cannot actually afford. The fact that one has to pay for the goods at a later date is then ignored. Sometimes people forget that they still have to pay a debt, so that they do not have enough cash in their account on the due date, which also leads to irregular late payments.