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Irrevocable Letter of Credit Template
What Is an Irrevocable Letter of Credit?
An Irrevocable Letter of Credit is a formal statement prepared by the bank that agrees to pay the seller of the goods on behalf of the buyer once the terms and conditions of the transaction between these two parties are met. You can download a printable Irrevocable Letter of Credit template through the link below.
Alternate Name:
- ILOC.
This document is different from similar guarantees issued by financial institutions because the bank is not allowed to alter the terms of this letter of credit unilaterally - to do that, it is necessary to obtain the full consent of all parties involved. A guarantee of this kind reduces or even eliminates the existing risk of transaction failure and allows the seller and purchaser to be confident when doing business especially if they have never worked with one another.
How to Write an Irrevocable Letter of Credit?
Follow these steps to compose an Irrevocable Letter of Credit:
- Draft this document on the bank letterhead - you should identify the financial institution, add its contact information, and insert the logo if it is customary for your organization. There is no uniform Irrevocable Letter of Credit format so you are free to choose what to include in this document as long as you state all necessary details.
- State the name of the document and indicate the dates when it becomes enforceable and when it expires.
- Name the parties to the agreement covered by the letter - the seller (beneficiary) and the purchaser (applicant). Explain the reason for creating this guarantee - you should specify which contract you are going to secure.
- Describe the liability of the bank under this credit - for instance, you will send the deposit to the seller once both parties notify you they are satisfied with the performance of their agreement and all provisions of their contract have been complied with.
- Indicate the party that pays all fees for the guarantee - usually, it is a seller.
- Record the deadline negotiated with the parties - unless you receive a formal confirmation of the transaction by a certain date, you can terminate your liability regarding the agreement. You can determine what counts as a notification - sometimes, a formal statement is enough, but it is possible to ask for evidence that proves the transaction was successful.
- Sign the letter and obtain signatures of the seller and purchaser that verify their understanding of the conditions of the credit.
How to Get an Irrevocable Letter of Credit?
You can ask your financial institution to provide you with an Irrevocable Letter of Credit form. Since it is mostly used in transactions where one party is an importer and the other is an exporter, it is likely you will be referred to the department of the bank that handles international operations. Alternatively, the parties may request this guarantee for a domestic transaction which is recommended if a large amount of merchandise that costs a lot of money is involved.
An Irrevocable Letter of Credit cost varies depending on the amount of money stated in the agreement, length of the original contract between the parties, and the potential risk of the deal. However, usually, the fees do not exceed 1% of the contract price.
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