A Letter of Intent (LOI) is a formal document issued by a prospective buyer expressing their intention to purchase a specific commodity under defined terms. It serves as the starting point for a commodity transaction and signals seriousness to the seller.
Purpose of an LOI
An LOI communicates the buyer’s requirements to the seller, including product specification, quantity, destination, delivery terms, and target pricing. It allows the seller to assess whether they can fulfill the request and initiates the negotiation process.
Key Elements of an LOI
A well-structured LOI should include: the buyer’s company profile, product name and specification, required quantity and delivery schedule, target price, Incoterms, destination port, payment terms, and validity period. It should be on company letterhead and signed by an authorized representative.
LOI vs. ICPO
An LOI is a non-binding expression of intent, while an Irrevocable Corporate Purchase Order (ICPO) is a firmer commitment to purchase. In practice, many transactions begin with an LOI and progress to an ICPO once terms are agreed in principle.
Best Practices
Buyers should ensure their LOI is detailed, realistic, and backed by financial capacity. Vague or unrealistic LOIs are often rejected by sellers. Including banking references and a clear timeline strengthens the buyer’s position.