A deferred check is a post-dated check used in trading. They are primarily used as an investment vehicle rather. In some countries, deferred checks can be traded on exchanges in much the same way as corporate bonds.
In this use case, a company has its bank issue deferred checks with a fixed face value and a future maturity date. The company then offers these checks to investors at a discount on their face value. When the checks reach their maturity dates, investors can cash them for their full face value. The difference between the price which investors pay for discounted deferred checks and the face value at which they can cash the checks in the future makes up the interest on the loan (See also: Zero coupon bonds).
Example: A company needs to raise capital to invest in expansion. It writes 1000 deferred checks for the equivalent of 1000 Swiss francs each and post-dates the checks using a date exactly 5 years in the future. It then sells these checks to investors for the equivalent of 900 francs per check, raising a total of 900,000 francs which it uses to expand over the next 5 years. At the end of the 5-year term, the investors cash their checks for 1000 francs each, making a profit of 100 francs per deferred check.
Deferred checks can also be used in much the same way as futures contracts. The writer of the check specifies an amount of money which can be withdrawn from their bank by the holder of the check and the date from which the checks holder is entitled to withdraw the money. Instead of entering into a futures contract which guarantees that a buyer will purchase goods from a seller for a predetermined price on or after a predetermined future date, the buyer simply writes a deferred check for the predetermined payment which the seller can cash on or after the predetermined date.
Example: A commodities investor wants to buy 1000 bushels of wheat at 7 Swiss francs per bushel because they believe that wheat will be worth 9 francs per bushel after the harvest. A wheat farmer wants to be sure that their basic growing costs of 7000 francs will be covered before they invest in planting their next crop. The investor writes out a deferred check for 7000 francs which the farmer can cash on a date in the future after the wheat has been harvested and 1000 bushels of wheat have been delivered to the investor. The farmer now has a guarantee that their basic costs will be covered, and the investor can rest assured that they will receive 1000 bushels of wheat at 7 francs per bushel. On the date specified on the check, the farmer can cash or deposit the check and receive the 7000 francs from the investor’s bank. If the farmer fails to deliver the wheat as promised, the investor can cancel the check ahead of its maturity date.
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