Letter Of Credit Collateral Agreement

A credit is an important means of payment in international trade. It is especially useful that buyers and sellers may not know each other personally and are separated by distance, different laws in each country, and different business customs. [8] This is a primary method in international trade to reduce the risk that a seller of goods takes when making those goods available to a buyer. This is done by ensuring that the seller is paid for the presentation of the documents stipulated in the sales contract between the buyer and the seller. In other words, a credit is a payment method used to fulfill the legal obligations of payment from the buyer to the seller by paying the seller directly through a bank. Thus, the seller relies on the bank`s credit risk and not on the buyer to get the payment. As can be seen and as can be seen in Figure 2, the bank pays the seller the value of the goods when the seller provides negotiable instruments, documents that themselves represent the goods. T92 [10] After the presentation of the documents, the goods will traditionally be under the control of the issuing bank, which gives them the certainty of the risk that the buyer (who had ordered the bank to pay the seller) will return such a payment to the bank. (c) Acquisition Rights. A back-to-back LOC uses one LOC as a guarantee for a second.

Intermediaries in a trade agreement prefer this type of agreement. For example, a Texas department store wants to buy expensive custom jewelry from a wholesaler in New York`s Diamond District. The company is working with its bank to create a non-transferable and irrevocable LOC in favor of the wholesaler, who now has to pay a designer in Israel to make the jewelry. The wholesaler arranges a new LOC in favor of the designer and uses the first LOC as a guarantee for the second. The terms on both locs reflect important terms such as product quality and description, inspection and shipping. A documentary LOC is usually a thick and complicated contract….

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