A loan-to-pay (LOC) is a promise made by a bank to make a payment after verifying that someone is meeting certain conditions. Why does the seller ask for a loan? The seller wants more confidence for the buyer to pay. Maybe this buyer and seller never collaborated, or the order could be large enough to cause serious financial hardship if something goes wrong. For example, if the seller spends money on the manufacture and shipping of goods, the seller wants to recover those costs. The buyer cannot pay for several reasons (the buyer`s property could be confiscated for some reason, the buyer could go bankrupt, and so on). The sales contract is not part of a credit intake. The sales contract is only between the buyer and the seller, and LOC is based on information contained in the agreement, but the LOC is a separate document issued by a bank. First, a buyer (importer) and a seller (exporter) opt for a common activity. They agree on a price, quantity and other conditions and determine how and when the goods are delivered to the buyer.
As part of the contract, we assume that the seller requires the buyer to use a creditor (LOC). Financing: when the bank issues the LOC, the bank makes a promise and the bank is responsible for sending money. This is what makes a letter of credit so safe for sellers – the fact that the bank assumes responsibility for the payment. For this reason, the bank must have confidence in the fact that the buyer can finance the payment. Before the bank issues the LOC, the buyer may be required to deposit money with the bank or the bank may arrange financing for the buyer under the LOC. The details are important: it is important that the bank recovers all the details correctly. The LOC is a legally binding document and these documents are interpreted exactly as they are written. Here too, the LOC is separate from the sales contract and is based on documents – not executed actions – so you can`t assume that everything works if an error occurs in the LOC. Even a seemingly insignificant element, such as a typographical error, can cause problems.
If the document is not perfect, it must be corrected before anyone moves forward. For this example, we assume that an importer buys goods from an exporter. HOWEVER, LOCs are useful for different types of transactions. Stand-by letters of credit can work at .B in the United States for a variety of services, including construction projects, registration for electrical service and much more. If you want to see how an LOC works for general domestic transactions, replace the terms “importer” and “exporter” with a customer or service provider in your sector.