Meaning
Security instruments issued by banks represent the final hurdle before moving goods through customs without immediate cash. The deferment guarantee allows a business to postpone the payment of duties to a later date. It functions as a bond that the tax authority can claim against if the importer defaults on its obligations.
Liability Coverage
The value of the instrument must match or exceed the total amount of tax deferred over a specific period (usually one month). Under a deferment guarantee, the guarantor assumes the risk of non-payment by the principal party. This protection allows for smoother movement of freight across borders.
Credit Requirement
Banks assess the solvency of a manufacturer before providing this type of backing. A deferment guarantee is typically only available to entities with a strong credit history and demonstrated cash flow.
Financial Indemnity
Costs for obtaining this security are a percentage of the total limit which adds to the overhead of the logistics department. Since a deferment guarantee stays in place for a year or more, it represents a fixed cost in the supply chain. Calling the guarantee early due to a missed payment terminates the ability of the firm to import goods on credit.
