What is Deferred Billing
Deferred billing is a sales promotion technique offering a grace period before payments must be made, typically for an auto or furniture purchase. Deferred billing offers may also include an interest-free period if a full-payment is made by a certain date. No-interest financing means that interest on a balance may be waived for a period or entirely depending on the credit arrangement. Car dealerships may offer “zero-interest” financing with or without a grace period for payments. Deferred or no-interest billing typically involves an approved credit agreement, and missing or making a late payment can result in additional costs. Deferred billing or a zero-interest loan can encourage impulse buying.
BREAKING DOWN Deferred Billing
Deferred billing may be used to encourage potential customers to purchase big-ticket items immediately rather than later (or not at all) and is also used with less expensive, non-interest-bearing purchases such as magazine subscriptions. From a retailer's standpoint, deferred billing may encourage a customer to make a purchase because they believe they are being rewarded for having good credit, or will be better able to afford the purchase in the future.
Buyers Must Beware
Offering a no-interest period appeals to a customer’s perception that they are saving money. For expensive items, buyers fill out a credit application, and there can be penalties and increased interest rates for late payments. For example, if there is a 6-month no-interest period, the interest still accrues, but is “forgiven” if the entire loan is paid off within the six-month period. If a payment is late, the forgiven interest will be added back onto the balance and will continue to accrue until the loan is paid off.
Deferred billing can affect a company's income statement and balance sheet due to when revenue is recognized. Companies may also re-sell loans made with deferred billing or interest-free features.