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Letters of Credit: Worth the Hassle & Expense?

Matt Treat's Profile


Topic Expert
Keith Perry
Title: Director of Global Accounting
Company: Agrinos, Inc.
(Director of Global Accounting, Agrinos, Inc.) |

Well, yes. In many industries (especially import/export) trust can be lacking, and the LOC protects everyone.

LOCs can also ensure that the funds needed exist...which when dealing with unknown or unstable companies can remove significant business risk.

Topic Expert
Patrick Dunne
Title: Chief Financial Officer
Company: Milk Source
(Chief Financial Officer, Milk Source) |

They are absolutely worth it. Depending on the situation, they may be the only way to protect yourself. International clients or situations where you do not know your customer well is where they will work best.

Topic Expert
Wayne Spivak
Title: President & CFO
LinkedIn Profile
(President & CFO, |

Yes, yes and YES for the reasons that Keith and Patrick stated, but their are many other uses for a LOC.

I've used them for performance based contracts with vendors I didn't think could do what they said they would.

The only problem is the banks are making it a money making venture, acting as if it is a loan, when it is a fully collateralized bank account with a contractual payment option.

Topic Expert
Linda Wright
Title: Consultant
Company: Wright Consulting
(Consultant, Wright Consulting) |

In many international situations, there is no good alternative. I always shopped them, looking for relationship opportunities, before I needed a particular stand by. Documentaries, requiring technical compliance with terms and conditions, can be more difficult to shop. They tend to move you towards the largest, most sophisticated international institutions.

david waltz
Title: Assistant Treasurer
Company: Integrys Energy Group
(Assistant Treasurer, Integrys Energy Group) |

When considering them in collateral situations where posting cash is also an option L/C's can be a more expensive alternative depending on what your investment return / borrowing rate is.

Martin Buckle
Title: President
Company: Bjorklund & Company
(President, Bjorklund & Company) |

I've used them as an alternative to cash in escrow eg for environmental guarantees as well as for international trade. A few years ago the banks realised that they had been under-charging for them because they were potential cash obligations that were costing them capital and the price shot up as a result. One of my banking partners totally pulled out of the business leaving me high and dry because of their own thin cap issues. I will never use that bank again.


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