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What is Letter of Intent? Definition, Function and How to Make It

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    A Letter of Intent (LOI) in the business world is used as the first step in starting a collaboration. Here's the complete explanation! In the business world, there are many things you need to understand and master, especially in dealing with other businesses.

    A business cannot run alone. A business will always have partners who act as suppliers, supporters, organizers, or collaborate in other forms.

    Procedures for starting collaboration between businesses also need to be carried out correctly. The reason is, cooperation between two businesses must be mutually beneficial and be established with a clear agreement.

    One component that is always present in business collaboration is a letter of intent or LOI. This document is required as a first step for businesses in exploring agreements and other partnerships. In this article, we will discuss a complete explanation regarding letters of intent along with their types, functions and how to make them. Listen until the end, OK.!!

    Understanding a Letter of Intent

    What is Letter of Intent? Definition, Function and How to Make It

    According to Investopedia, a letter of intent (LOI) is a document that states an initial commitment from one party to do business with another party. This document outlines the main terms of the agreement that will take place.

    Commonly used in large business transactions, an LOI has similar content to a term sheet. However, one key difference between the two is that the LOI is presented in letter format, while the term sheet is listicle in nature.

    LOI is useful when there is a meeting between two parties who want to reach an agreement before the more detailed points of a transaction are explained further. LOI documents often include provisions stating that the deal can only be consummated if financing has been guaranteed by one or both parties.

    As well as stating that the agreement can be canceled if the papers are not signed by a certain time. This letter can be made by one party, then responded to by the other party with a reply letter. However, both parties can also create their own LOI and mutually sign both letters.

    There are various initial provisions contained in the LOI. These provisions relate to further steps and actions that need to be taken to continue cooperation. Includes an explanation of various conditions that could arise and invalidate the LOI at a later date.

    Purpose and Function of a Letter of Intent

    A letter of intent can be used by various parties for various purposes. This letter can be used to outline the initial and basic requirements of a collaboration. LOI is also a signal that the two parties are negotiating an agreement on a joint project, whether it concerns employment, mergers, acquisitions, share purchases, or joint ventures.

    In general, LOI aims to explain the points of the initial agreement that will be negotiated further, protect all parties involved, and announce the form of agreement that will be entered into (acquisition, merger, etc.).

    Judging from its function, LOI can be used as part of work, business and educational needs.

    1. LOI Function for Workers

    Job seekers may use a letter of intent addressed to a company manager as a way to introduce themselves, much like a job application letter. However, the information contained in the LOI tends to be more complete and can be sent at any time, even if there are no job vacancies.

    The hope is that the LOI can be accepted and entered into the company database. That way, if the company in question is opening job vacancies, managers can identify information about prospective workers and call them for recruitment.

    That way, recruiters don't have to open job vacancies on the jobseeker portal and you can also be a priority for open positions.

    2. LOI Function for Business

    Businesses use LOIs to announce an initial agreement or the imminent start of a new relationship with another business. Before a formal agreement document is created, the LOI will be the initial letter that opens further negotiations.

    Agreements in business can occur in the form of sales, purchases, procurement of goods, acquisitions, asset purchases, mergers, joint ventures, and so on.

    3. LOI Function for Education

    In the world of education, LOI is often used as an initial statement regarding the goals of prospective students wishing to continue their education. Usually, prospective students can send a letter of intent to the university as part of the registration materials or files.

    The LOI letter contains a statement about the prospective student's profile, educational history, biodata, and objectives for pursuing education.

    Types of Letters of Intent

    Types of Letters of Intent

    For your information, LOI is often referred to as a framework letter, letter of interest, intent to purchase letter, and assurance letter. Summarized from Contracts Counsel, there are several types of LOI that are commonly used. Here's the explanation:

    1. LOI purchase of real estate, business, or property

    You can use a letter of intent to express your intention to purchase commercial, residential, or business property.

    2. The letter is not a formal purchase agreement.

    This is because the terms and conditions of the business transaction must be stated in a separate purchase agreement that must be agreed upon by all parties.

    3. LOI for scholarship acceptance

    Students can send a letter of intent to the institution or organization that organizes the scholarship program.

    The letter should express appreciation for the scholarship received and express gratitude for the opportunity.

    4. Graduate school LOI

    If you intend to apply to continue your graduate school education, you can send a letter of intent to the university you are applying to. Some campuses may even require an LOI as part of the student admissions process.

    This letter contains a statement that you have submitted your application and states the postgraduate program you are applying to.

    5. Acquisition LOI

    This type of letter of intent is similar to the one you would use when buying a business. However, this letter is confidential. This LOI letter may contain initial statements and requirements that are needed before carrying out further negotiations.

    6. Job LOI

    You can send an LOI to express interest in working for a company, even when there are no vacancies available.

    The letter can state the type of position you are interested in. So that if the company opens a job vacancy later, your application will be a priority.

    How to Make a Letter of Intent

    After knowing the initial explanation about LOI, you are ready to create your own LOI for various purposes. Below is a guide to making an LOI that you can follow, note down the steps, okay?

    Step 1: Create a Mailing Identity

    Every official letter addressed to an individual or agency needs to have a letterhead. This applies if you send a letter of intent on behalf of an institution or company.

    If sending it on behalf of an individual, you can skip this step. The letterhead contains the sender's identity, including logo, company name, address and contact.

    Step 2: Opening Part

    Next, you need to write the opening part of the letter. Like other official letters, this section contains the identity of the recipient of the letter and other general information.

    Including the date the letter was written, recipient's name, recipient's location, attachment information, and subject.

    Step 3: Fill Out the Letter

    In this section, the letter of intent can be divided into several paragraphs. The first paragraph usually contains a greeting, brief introduction, and the purpose of the letter. For example, if the LOI is used to purchase a home, then convey that intent in this paragraph.

    The second paragraph can contain more detailed information about the objectives you stated previously. For example, you can convey the type of house in question, the complete address, number of units, and other more detailed information.

    In the third paragraph, you can convey your initial wishes or initial requirements. Including the house price you expect, the tenor you want, and other statements. This third section can also contain other information that you want to talk about at the next opportunity.

    Step 4: Cover

    The final part is the concluding paragraph. In this section, you need to express your thanks and contact details where you can be contacted. Includes telephone number, office address, and email address.

    That is a complete explanation of a letter of intent which functions as an initial statement before the start of negotiations and further agreements between two parties.

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