IRREVOCABLE LETTER OF CREDIT AT SIGHT LÀ GÌ
Khadija Khartit is a strategy, investment, và funding expert, và an educator of fintech và strategic finance in top universities. She has been an investor, entrepreneur, and advisor for more than 25 years. She is a FINRA Series 7, 63, and 66 license holder.
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What Is an Irrevocable Letter of Credit (ILOC)?
An irrevocable letter of credit (ILOC) is an official correspondence from a bank that guarantees payment for goods or services being purchased by the individual or entity, referred to as the applicant, that requests the letter of credit from an issuing ngân hàng.
An irrevocable letter of credit cannot be canceled, nor in any way modified, except with the explicit agreement of all parties involved: the buyer, the seller, và the issuing bank. For example, the issuing bank does not have the authority by itself to change any of the terms of an ILOC once it is issued.
An irrevocable letter of credit (ILOC) is a guarantee for payment issued by a ngân hàng for goods & services purchased, which cannot be cancelled during some specified time period.ILOCs are most commonly used lớn facilitate international trade.A confirmed ILOC offers additional risk protection for the seller by providing a guarantee of payment from both the buyer's ngân hàng và the seller's ngân hàng.
Understanding Irrevocable Letters of Credit
A letter of credit is issued by a commercial ngân hàng guaranteeing that a buyer's payment lớn a seller will be received on time và for the correct amount. In the sự kiện that the buyer is unable khổng lồ make a payment on the purchase, the ngân hàng will be required to lớn cover the full or remaining amount of the purchase.
Due lớn the nature of international dealings, including factors such as distance, differing laws in each country, và difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.
Although an ILOC is irrevocable while it is in force, generally the time period during which a proposed transaction is expected to lớn be completed, an ILOC expires at a specified point in time, which is noted in the letter of credit.
ILOC Specifications
Irrevocable letters of credit are official ngân hàng correspondence transferred & authenticated through the Society for Worldwide Interngân hàng Financial Telecommunications (SWIFT) banking system. This is a global setup for facilitating financial transactions between banks or other financial institutions, và an ILOC is transmitted as MT700—message type 700.
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An ILOC provides greater security of payment to lớn the beneficiary of the letter, who is commonly the seller in a transaction. ILOCs are frequently sought for large construction projects because they are not subject lớn claims of preference in the event of a bankruptcy.
ILOCs are most commonly used lớn facilitate international trade because of the additional credit risk involved when two parties unfamiliar with each other are transacting business across national borders. An ILOC assures the seller of receiving payment because it is a guarantee by the issuing ngân hàng, the buyer's bank, that it will make payment in the event the buyer fails to lớn bởi vì so. By providing the seller with an assurance of payment, an ILOC also assists the buyer in arranging a transaction that the seller might otherwise be reluctant khổng lồ make.
How an ILOC Works
An ILOC is a means of facilitating a transaction between a buyer và seller with the assistance of their respective sầu banks. The buyer requests an ILOC from his bank, which is then sent lớn the seller"s bank. In addition to lớn providing credit risk protection, an ILOC typically also specifies important details of the transaction, such as price, payment terms, & time and place for delivery of goods. In the sự kiện the buyer fails lớn make payment as agreed, the buyer"s ngân hàng makes payment lớn the seller"s bank, which in turn renders payment lớn the seller, the beneficiary of the ILOC.
ILOCs can also be either confirmed or unconfirmed. A confirmed ILOC offers additional risk protection for the seller by providing a guarantee of payment from both the buyer"s bank & the seller"s ngân hàng. With an unconfirmed ILOC, the seller"s ngân hàng has no liability for payment and essentially serves only as a go-between to lớn transfer payment khổng lồ the seller from the buyer"s bank.
A letter of credit is a letter from a bank guaranteeing that a buyer"s payment to lớn a seller will be received on time and for the correct amount.
A sight draft is a type of bill of exchange, in which the exporter holds the title khổng lồ the transported goods until the importer receives và pays for them.
A ngân hàng letter of credit policy assures a company engaged in an international transaction of the creditworthiness of the buyer.
A confirmed letter of credit is a letter of credit with a second guarantee obtained by a borrower in addition to lớn the first letter of credit.
A demvà guarantee is a khung of protection for a contract that provides payment if one of the parties does not meet its obligations.
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A credit default swap (CDS) is a particular type of swap designed to lớn transfer the credit exposure of fixed income products between two or more parties.