Irrevocable Letter Of Credit

**Camosilver** · 02-12-2008 02:43 PM

I am starting a used car dealership, and need to get either a surety bond or an irrevocable letter of credit (Florida requires one or the other for used car dealers). I have already sat down with an agent who issues bonds and it is not too easy to get one, so I am considering the irrevocable letter of credit.

I have never heard of an irrevocable letter of credit until now, and other than going to the bank to get one, I know nothing about how it works and how easy it is to get one.

I had a 760 midscore last year before I built my house, and it should be higher now since I have paid everything on time since then.... BUT, it's going to be a new business, and I quit my 9-5 to concentrate on getting this going, and therefore have no provable income right now. Will this be a problem? Are they going to want to see a business plan?

If anyone here has ever had to get one, can you tell me a little more about the process and the requirements of obtaining it?

**OnTheWayUp** · 02-12-2008 03:00 PM

Irrevocable letter of credit is a payment agreement that can't be canceled. This guarantees that a buyer's payment to a seller will be received on time and for the correct amount.

Definition from Investopedia:

A letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.

This type of letter is usually used in foreign trade, are you trading foreign cars or involved in foreign cars?

Heres's a link that can probably help you on letters of credit work:

Letters of credit definition, explanation with an example

**Camosilver** · 02-12-2008 03:09 PM

The state of Florida, and every other state to my knowledge, requires either a surety bond or irrevocable letter of credit.

I need a $25,000 bond or letter of credit. I just called my bank and they said to get the letter, I have to give them $25,000 and put it in a CD which I cannot touch!!! And, I have to pay them $250-$500 a year for them to hold my money!!!

I guess I will just take out a business loan for the $25k, and use that for the letter of credit, or bond. I think I only need to hold the bond/letter for the first year, and after that I don't need one. I THINK. That's what the agent I spoke with who issues bond said. We've got about $40k cash, but that's going towards purchasing cars, insurance, supplies, etc, we can't afford to just let 25 grand rot away in the bank for a year.

**OnTheWayUp** · 02-12-2008 03:20 PM

In the link above, the example states:

1)You go to First American Bank and request a $50,000 letter of credit with Seoul Manufacturing as a beneficiary.

2)The bank goes through its underwriting process. Although the bank is not advancing money, they are extending credit on your behalf and are taking on a contingent liability. If your company qualifies from a credit standpoint the LC is issued.

3)Even if your company does not qualify for credit, you can still get an LC if you are willing to put cash collateral CD secured letters of credit are very common for small business .

4)The bank sends a copy of the letter of credit to First Seoul Bank, which lets the vendor knows and the merchandise is shipped.

So what I see happening is that you do not qualify for credit, and they are giving the option to get a loan (because they know you don't have the money) and put it on a CD. This way, you pay up no matter what because the bank has your money!

**Camosilver** · 02-12-2008 03:37 PM

I have talked with two banks now, and that's not what they are telling me. BOTH said, "if you want an irrevocable letter of credit for $25,000 you need to give us $25,000 cash and let it sit in an account we open with the money for however long you wish the letter to be valid for, and for us to have your money it will cost you a few hundred bucks a year"

They didn't run my credit, or ask for any asset info or income info, so it's not that I didn't qualify, right off the bat they told me what I already stated above. They didn't offer to set up a business loan for me, I was just thinking that's the only way I am going to get an extra $25k that I didn't plan on needing.

**yourhostingspot.com** · 02-12-2008 03:38 PM

Will the 25,000 be gaining interest? That could cover part if not all of the yearly payments.

**Camosilver** · 02-12-2008 03:44 PM

If they put it in a CD like one bank mentioned, it would. But that money does me no good in the bank... do you know how much money there is to be made on $25k worth of cars?

**Xoticar** · 03-09-2008 03:36 AM

Forget the letter of credit, that is only for people unable to qualify for a surety bond - which is what you are really needing to open a dealership in Florida.

Just google 'surety bond' and apply for one in the amount of $25,000. If you have decent credit it will cost you a few hundred dollars a year. If your credit is damaged, you will pay much more for the surety bond.

The letter of credit is used in cases where you have no credit file in this country or are totally unable to qualify for a surety bond.

I found this information and more at dsiagency dot com, a web site that says it provides dealer classes needed to get a license. The web site looks quite dated, you may want to look for a similar company in your area.

Wish us both luck, I want to get a dealer license in Miami and attend the Orlando car auction. I am going to specialize in only two kinds of cars, Mercedes/BMW for the high end market and Any Make for the 'kids first car' market. Only dependable cars with extended warranty and GPS location devices.

**Sunriser** · 05-21-2008 10:38 AM

Camosilver...
i am right now in the same situation and i cannot find any bank, that accepts the format of the letter of credit of the DMV.
I am willing to pay 25,000 in a CD and leave it there, but i can't move on...

What bank did you contacted in Florida, that were willing to give you that Letter of Credit?

Thanks for the answer..