A letter of credit forms part of an agreement whereby an investment is agreed and a payment or completion date is assured. Should the payment not be made this will have to be covered by that institution responsible for the assurance of payment.
A pledge to fund a letter of credit will need to be made using assets or cash as a collateral for a default on the credit. Typically a set fee will be issued alongside the letter in order to see profit following the transaction. This fee will be a percentage of the credit and is sometimes based on the level of risk involved with the credit given.
Broadly there are three types of letters of credit, a commercial letter of credit, revolving letter of credit and confirmed letter of credit.
Each works in a different manner and it the need to investigate further into LoC within complex financial transactions, debt management, or payment in kind should always be considered.
Within Redcliffe Training we provide a number of courses covering Letters of Credit: