What Is a Letter of Credit?
A Letter of Credit is a special type of bank guarantee that confirms the bank's promise to pay the seller (beneficiary) on behalf of the buyer (applicant) a specified amount of money that covers the purchaser's contractual obligations. Whether the parties engage in international trade where the goods are delivered for a certain sum of money or there is a performance transaction and the contractor must work on a building project, a Credit Letter serves as a guarantee that both parties intend to carry out their contractual duties and are prepared to enlist the support of a financial institution to show their goodwill.
If you are looking for a Letter of Credit template suitable for your situation, you may check out our library below. Each document is unique, and it is up to the bank to determine which provisions are listed in the final version of the letter. However, at a minimum, consider including the following details in your Letter of Credit:
- Identification of the bank, beneficiary, and applicant.
- Description of the original contract between the parties that will be covered by the credit and a short reference to the contractual obligations that must be fulfilled.
- The unequivocal promise of the bank to pay on behalf of the breaching party - here you can choose which events and notifications trigger the payment.
- The expiration date of the bank offer to secure the payment.
- Letter of Credit fee - generally, paid by the seller.
- Signatures of the parties.
Types of Credit Letters
Below you can find the most commonly used Letter of Credit templates - ensure the full and timely payment to the beneficiary of the contract and build a trusting relationship with your business partner.
- Letter of Credit. This is a generic template you can prepare for any occasion whether the transaction you need to secure is small or large, domestic or international;
- Standby Letter of Credit. Clients can benefit from this secondary payment option that safeguards the interests of the seller in case the purchaser can no longer make payments;
- Irrevocable Letter of Credit. Quite similar to the document above, this bank guarantee cannot be modified by the choice of one of the parties or the bank.
How Does a Letter of Credit Work?
Whether you have worked with the other party before or not, you both represent one country or are foreign to each other, it is never a bad idea to find more ways to secure your goods, services, and finances. A Credit Letter is a great financial tool that protects the beneficiary and the applicant - if the purchaser cannot pay for the delivered merchandise, the financial institution that issued the deal will pay the seller. Additionally, it protects the buyer - in case the seller cannot provide products they promised, the purchaser will be compensated for the damages suffered, this kind of compensation being similar to a refund.
Typically, a Letter of Credit is prepared by the bank that has worked with either party or both of them in the past - the department that handles business credits and loans must be sure the parties will comply with the conditions of the original contract and only exceptional circumstances can prevent that from happening. To enforce the credit, the parties must forward documentation that proves they either fulfilled their duties or shows evidence of either party's failure to follow through with the agreement - it depends on the provisions of the Letter of Credit. This means the payment via the Credit Letter can be used.
Haven't found the template you're looking for? Take a look at the related templates below:
This letter, issued primarily by banks, is used in trade finance and provides an irrevocable payment undertaking.
This letter is a legal instrument that secures a bank's commitment to pay the seller in the event that the buyer (the client of the bank) defaults on the agreement.
This is an irrevocable agreement completed by a buyer and the buyer's bank in which the bank agrees to pay the seller as soon as certain conditions are met.