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Friday, April 13, 2012

Irrevocable Letter of Credit - What is it?

First, in an irrevocable letter of credit, the seller is the beneficiary, the buyer is known as the applicant, the seller’s bank is the advising bank and the buyer’s bank is the issuing bank.

What are they used for? Well, irrevocable letters of credit are many times used to facilitate international trade because of the additional risks involved. Essentially, an irrevocable letter of credit removes the seller’s credit risk by assuring the seller that payment will be made by the buyer’s bank should the buyer not pay the seller.

It is a financial instrument employed by banks to guarantee a buyer’s obligations to a seller. Because the letter of credit cannot be modified unless all parties agree to the modifications, it is called irrevocable.

Arrangement fees can range from 8-20% for 12 months, and 6-12% for 90-days. There are factors that weigh into this and they will be discussed with you as the client. Full prepayment is generally required with a minimum of $100,000 USD, but for transactions greater than 50MM, some may consider partial fee deferral. This will be discussed with the client only. Said fees are to be placed into an escrow account for the client. Check with your provider.

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