What is an Irrevocable letter of credit – ILO’
Irrevocable letter of credit (ILO) is the official correspondence with the Bank, which guarantees payment for goods or services purchased natural or legal person, referred to as the applicant that requested the letter of credit from the issuing Bank. Irrevocable letter of credit cannot be cancelled in any case not altered, except with the explicit consent of all parties concerned: the buyer, the seller and the issuing Bank. For example, the issuing Bank is not allowed to change any of the terms of the ILO after it was issued.
Breaking down the ‘Irrevocable letter of credit – ILO’
Although the ILO is irreversible, while he is in power, as a rule, the period of time during which the proposed transaction must be completed or the ILO expires at a time specified in the letter of credit.
Irrevocable letters of credit Bank official correspondence translated and certified through the society for Worldwide interbank financial telecommunication (Swift) banking system and global settings to facilitate financial transactions between banks or other financial institutions. The ILO is passed as MT700 – Type of the message 700.
The ILO provides greater security of payment of the letter, usually by the seller in the transaction. ILOCs are often in demand for large construction projects because they are not subject to claims of preference in case of bankruptcy.
Goal of the ILO
ILOCs are most often used to facilitate international trade because of the additional credit risk when two parties are unfamiliar with each other to conduct business beyond national borders. The ILO says the seller after receiving the payment, because it is a guarantee to the issuing Bank, the buyer’s Bank that it will pay in the event that the buyer won’t do it. Giving the seller a guarantee of payment, the ILO is also assisting the buyer in the transaction that the seller might otherwise not want to do.
How the ILO works
The ILO is a means of facilitating the transaction between the buyer and seller through the respective banks. The buyer asks the ILO from its Bank, which is then piped to the seller’s Bank. In addition to providing protection against credit risk, letter of credit, as a rule, also indicates the important details of the transaction, such as price, payment terms, time and place for delivery of goods. If the buyer fails to make payment agreed upon, the buyer’s Bank makes payment to the seller, who in turn provides payment to the seller, the recipient of the ILO.
ILOCs may be confirmed or unconfirmed. Confirmed the ILO provides additional security risk for the seller providing a guarantee of payment from buyer’s Bank and seller’s Bank. With unconfirmed ILO, the seller’s Bank is not responsible for payment and, in fact, serves as a mediator to transfer the payment to the seller from buyer’s Bank.