What is a Letter of Credit and how does it work
Always had questions about this modality? Read the following post that was created with the intention of answering any and all questions about this subject.
When buying a property, land or business unit, a consortium is a simple and effective way to realize a big dream. In this way, the consortium member pays monthly installments, according to previously established rules, attending meetings, with the possibility of being drawn to receive a letter of credit even before the deadline for the debt to be paid.
Thus, the letter of credit is a kind of payment promise that is issued by banks, most often as a way to assure sellers and, in some cases, buyers, that they will receive your payment as long as they fulfill what they initially agreed to do.
In Brazil, this modality is widely used in consortium contemplation, which works in two ways: by lot or bid. The assemblies hold raffles and those who are drawn receive the letter of credit to enjoy. Bids are useful for those who don’t want to depend on luck and the amount to be offered is determined by contract, and you can offer a portion of the letter of credit as a bid.
Understanding the terms and parties involved in the letter of credit
- Applicant: is the buyer in a given transaction;
- Beneficiary: is the seller or recipient of the resources;
- Issuing bank: is that bank that promises to pay the letter;
- Advisory bank: is the bank that helps the beneficiary to use the credit line;
- Irrevocable: The letter of credit cannot be revoked or canceled without the prior consent of all parties involved.
Where does the money behind a letter of credit come from?
It is important to note that any bank will only issue a letter of credit when it is sure that the buyer will pay. As such, some buyers have to deposit enough money to cover the letter of credit or, in some cases, use a special line of credit with the bank. Of course, this picture is that of a loan that will be generated for the buyer.
Advantages of Using Letter of Credit
Guarantee of security, as the letter of credit can only be used by your applicant. Moreover, the non-payment of fees and taxes is quite interesting, as the money contained therein does not directly enter the account of the person requesting it, ensuring purchasing power. In addition, it facilitates bargaining power by virtue of its resemblance to cash or debit payments. This way, you can purchase discounts or other facilities before deciding to actually close a deal.
How can I use the letter of credit?
- Purchase of goods;
- Redemption of investments;
- Settlement of financing;
- Compensation of values;