How do letters of credit work?
Consortium groups are widely used in Brazil as a means of purchasing goods and services. This modality has attracted more and more people, mainly because it enables them to achieve their goals in an economical and planned way.
All participants in a consortium will at some point be awarded a letter of credit – which is, after all, the main purpose of the consortium members. But do you know what a letter of credit is and how it works? Get all your questions on the subject right now!
What is letter of credit?
The letter of credit corresponds to the amount contracted in the consortium for the purchase of the good or contracting of the service, which the consortium member has access to after its contemplation. For example, a person who makes a $ 250,000 consortium will receive a letter of credit for this amount to use as set forth in the contract.
According to the selected modality, the consortium member can choose how to use his card:
- acquisition of property
- purchase of vehicle
- contracting services such as travel, aesthetic procedures, studies, among others
- discharge of a financing in progress
- reforms and improvements
- receive the value in kind – in this case it is necessary that the quota be paid and that it has been 180 days after its contemplation or after the group’s finalization.
What are your advantages?
Using the letter of credit for the purchase of goods and services offers a number of benefits to the consortium member. Among the main ones, we highlight:
- are safe as they can only be used by their holders
- maintain their purchasing power, being periodically adjusted by the indices defined in the contract or by the manufacturers’ tables
- may be used for acquisition of any good within the contracted category.
How to get the letter of credit?
To be eligible for a letter of credit you must be part of a consortium group. In addition, you must be on time with the agreed installments to be eligible for monthly contemplations under the contract with the administrator.
Thus, upon being contemplated, the consortium member will have access to his letter of credit and will be able to purchase the desired good or service. By the end of the group, all participants will have received their letter of credit.
How is contemplation done?
Contemplation is performed at ordinary meetings where members are randomly drawn to receive their letters of credit. Contemplations may occur at any time within the term set forth in the contract.
However, you have the possibility to increase your chances of being contemplated by bidding. It is nothing more than a value offered by the participant, which corresponds to the anticipation of installments of the consortium. Usually the highest bidder is awarded and has access to the letter of credit. Remember that you only need to pay the bid if it is the winner.
How should I use the letter?
It must be used to acquire a property of the same category as the consortium object. If it is a real estate consortium, for example, it could be a house, land or an apartment (new, used or on the floor). It is still possible to pay off financing.
Importantly, the letter of credit is a form of indirect acquisition, in which the amount is used by the administrator to pay the asset. Thus, the amount is not directly released to the consortium account, but is used for the purchase of the contract object. This ensures that the amount is not intended for other purposes.
How can I buy a contemplated letter?
It is still possible to purchase a contemplated letter of credit. To do so, you need to buy it from a third party. The change of ownership must have the consent of the administrator, as will also be assumed the remaining installments and any pending prior to the purchase.
However, it is important to note that some care must be taken in this type of trading to avoid scams. So make sure the consortium really exists in the management company and is actually contemplated. Also evaluate all documents relating to the group you wish to join and the terms of purchase and release of the letter of credit.
How is the letter of credit corrected?
In order for the consortium member to maintain its purchasing power throughout the consortium’s term, its letter of credit needs to be updated as required by the market. Accordingly, the quotas are adjusted periodically according to the value of the asset (in the case of vehicles) or based on indices indicated in the contract, such as real estate.
Since the consortium is a mode of acquisition in the form of shared economy, it is important that these resources be adjusted so that all consortium members have the same purchasing power until the end of the group. Therefore, the base value and consequently the installments continue to be adjusted even after contemplation.
Does the letter of credit have an expiration date?
It is not mandatory to use the letter of credit immediately after contemplation, and the consortium member decides when it is the best time to purchase the good or service. In this case, you can use it until the last group meeting, ensuring that you maintain your purchasing power and still enjoy the best market conditions.
However, it is important to be aware of the processes required to release your letter of credit, as explained in the next topic.
What are the procedures for using the letter of credit?
As already mentioned, the first requirement to qualify for the letter of credit is to have its quota covered. Following communication from the administrator to the consortium member, the company will review the required guarantees to ensure the financial health of the group. In addition, according to the property to be purchased, specific documentation will be requested for credit release.
The steps are as follows:
- confirmation of contemplation: communication will be made to the consortium member eligible for contemplation
- presentation of documentation: documents will be requested, which vary from administrator to consortium
- choice of good: the consortium member evaluates in the market what he wants to acquire according to his contract;
- Negotiation with the seller: the transaction is all carried out by the consortium member, with the administrator only paying the payment
- transfer of information to the administrator: after defining all the details, it is necessary to inform the company about all the negotiations made, including the payment methods, so that it can perform it
- supplementary value, if necessary: if purchased good has a greater value than that of the letter of credit, the consortium member must supplement the required amount.
Finally, always be aware of the rules regarding your contract as not to be caught off guard when purchasing your good or service. Therefore, be aware of the guarantees required for credit release, among other conditions. Also, be aware that the letter of credit cannot be used to purchase a property outside the contracted category, ie you cannot purchase a property with a covered letter of credit, for example.
In short, the letter of credit is the goal of every person who begins to be part of a consortium group and is nothing more than a money order for the good or service to be purchased. That is, it is a secure form of transaction that holds the purchasing power of the consortium member and can be used in various types and modalities of negotiations.