Lenders qualify the borrower before issuing a letter, and businesses generally receive letters from the bank, which provides regular financial services to the business. One of the advantages of a trade letter is the regulation of the International Chamber of Commerce, which governs the terms of the letter of credit and the payment procedure. Standby letters of credit are documents showing that a company has the financial means to pay for an order. If the company requesting the order does not pay the bill, the bank that issues the accreditor assumes responsibility for the payment of the order. Watch letters have a time frame and are covered by the same rules as standard letters of credit. Lenders sometimes ask new businesses to set up cash loans for a letter of credit or credit for the purchase of inventories or raw materials. Companies that work with a new bank or financial institution also face requests for cash guarantees. The issue of guarantees allows the lender to recover the debt if the company does not pay the goods ordered. Once the new company has developed a history of quick payment to lenders, the lender can no longer require the cash guarantee when it provides a creditor. LCs are equally involved in the guarantees and guarantees that support loans granted under the corresponding credit facility.
As a general rule, the issuer of LC assumes no liability (fraud or gross negligence) for any action taken with respect to each LC. The borrower assumes all of the risks associated with a beneficiary`s actions or omissions with respect to the use of LC. LC that have not yet been used by their beneficiaries, decreases the liabilities available under the loan contract, since they must be financed by lenders when used by their beneficiaries. This is true regardless of whether, on that date, the borrower is able to meet the conditions for impregnating the corresponding loan contract and to borrow under the corresponding credit facility. In the face of general economic uncertainty in today`s world and recent market turbulence, we have seen private equity funds struggle to preserve and secure future liquidity, albeit at a higher price than before. Similarly, in this volatile economic environment, the parties increasingly want certainty that they will be paid. Letters of credit (“LC”), which are often included in revolving underwriting facilities, give borrowers the ability to secure contracts with third parties, which guarantees the recipient that they are being carried out as a whole. In this context, we felt that it would be useful to define the introduction of LC ourselves, including their articles and their adaptation to revolving subscription credit facilities. For those who are not familiar with LC, an LC is essentially an irrevocable business for the payment of money spent by a bank at the borrower`s request for a third-party beneficiary.
There are many types of LCs; However, the 100,000,000 D pending are the most common in financing transactions and end up in revolving subscription credit facilities. The expiry date of an LC is usually 12 months after the issue date, which may be extended at the discretion of the LC transmitter. LCs that expire beyond maturity must be fully guaranteed in cash (normally 30 days before maturity).