Importance of a Letter of Credit While Renting Commercial Property

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Importance of a Letter of Credit While Renting
Commercial Property
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A letter of credit (LOC) is a document that
guarantees rent payments up to a negotiated
amount to a landlord in the event the tenant does
not pay your commercial lease payments.
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Generally, it is used in lieu of cash for the
security deposit required when renting commercial
real estate.
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In the event that the buyer is unable to make
payment on the purchase, the bank will be
required to cover the full or the remaining
amount of the purchase.
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How does a letter of credit work?
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A letter of credit guarantees payment of a
specified sum in a specified currency, provided
the seller meets precisely-defined conditions and
submits the prescribed documents within a fixed
time frame.
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These documents almost always include-

• A clean bill of lading

• Commercial invoice

• Certificate of origin

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Importance of letter of credit
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A letter of credit has various advantages while
renting your commercial property and some of them
are discussed below
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Safely expand business
A letter of credit gives the trade partners an
ability to transact with unknown partners or in
newly established trade relationships.
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Highly customizable
A letter of credit is highly customizable as both
the property owner and the tenant can put in
terms conditions as per their requirements.
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Works as a credit certificate for tenant
A letter of credit transfers the
credit-worthiness of the tenant to the issuing
bank, which allows him to do multiple
transactions at the same time.
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Timely payments lead to better cash flow
A letter of credit provides certainty to the
amount and timing of the exporters cash flows
and he can plan his financing needs well in
advance which reduces his risk.
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Types of a letter of credit
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There are many types of letter of credit and the
use of each depends on the bank, the credit
worthiness of the person leasing and the owner of
the commercial property.
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The letters of credit are mainly used for buying
commercial property or leasing a commercial
property and the most commonly used letters of
credit are described below.
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Irrevocable letter of credit
An irrevocable letter of credit is a document
used by banks to guarantee a buyer's obligations
to a seller and it cannot be modified unless all
parties agree to the modifications.
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Revocable letter of credit
Revocable letter of credit can be modified or
canceled by the issuing bank after its issuance
at any moment without seeking the beneficiary's
consent.
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Standby letter of credit
A standby letter of credit is a guarantee of
payment by a bank on behalf of their client and
it helps prove a business credit quality and
repayment abilities.
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Apart from all the benefits of using a letter of
benefit, there are also some drawbacks which
should be taken into consideration while signing
the commercial property deal.
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They cut into your potential borrowing power and
the collateral that you pledge for the LOC will
not be available for another business loan.
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