As the name suggests, a deferred payment is one that is delayed, either completely or in part, in order to give the person or business making the payment more time to meet their financial obligations. In accounting terms, any merchant allowing customers to set up a deferred payment agreement will be dealing with accrued revenue. This is the term that applies to money not yet been received in lieu of goods or services that have already been supplied to the customer.
Understanding how a deferred payment loan of this kind operates will enable a merchant offering it to maintain control of their cash flow.
Examples of a deferred payment agreement
A credit card that offers zero interest rates is an example of a deferred payment arrangement, since the bank that supplies the line of credit will collect the monthly payments without the revenue that would normally be guaranteed by the interest added. This is an example of deferred revenue, just as, from the customer’s point of view, any deferred payment agreement they enter into should be regarded as creating accrued expenses.
This is particularly important from the accounting point of view of any business taking advantage of a deferred payment agreement, as it means there is a specific amount of money representing the payments that haven’t been made for goods already received.
Sectors most likely to use a deferred payment agreement
The example of an interest-free credit card, or a bank loan, via which the lender defers the revenue from the interest charge until the loan has been fully repaid, is one way in which individuals can take advantage of the flexibility provided by deferred payments. The popular buy now, pay later schemes used by consumers, such as Klarna, are an obvious example of a deferred payment agreement, in this case with a third party bearing the brunt of the deferred revenue rather than the merchant.
Deferred payment agreements are popular accounting methods in particular industries, such as the following:
Agriculture – farmers may make use of deferred payments on crops for two reasons: to shift the tax burden to another year and to free up cash flow to pay employees.
Education – some educational institutions, such as colleges and universities, recognise that fee-paying students may sometimes experience temporary periods of hardship that make it difficult to keep paying the fees owed. In many cases the institution will offer a deferred payment agreement, viewing this as being preferable to a student having to disrupt or even end their education. Under such schemes the student will be given longer to make the payments, but may well be charged a fee for the provision.
The student loans system operating in the UK is an example of a country-wide deferred payment scheme, in that it gives students up to 30 years to pay their student fees as a percentage of earnings, with anything unpaid after that time written off entirely.
How a deferred payment agreement works
In some cases, a deferred payment plan will involve a percentage of the overall amount being paid at different intervals. In others, the seller will allow for a grace period before the regular payments have to start. Deferred payment plans of this kind are often used to attract new customers through slogans such as “Buy Now – Pay Nothing For 12 Months”.
We can help
If you’re interested in finding out more about how deferred payments work, then get in touch with our financial experts. Discover how GoCardless can help you with ad hoc payments or recurring payments.