Letter of CreditRealized1031.com2019-04-26 08:00:00
Letter of Credit
A letter of credit is a letter from a bank or other financial institution which guarantees an investor’s payments to a third party. If the investor does not make its payments pursuant to its agreement with the third party, the party issuing the letter of credit will be required to make the payment of fund any shortfall.
For example, imagine Company ABC is interested in purchasing 1,000 widgets from Supplier XYZ for $1 million. Given Company ABC’s weak credit rating, Supplier XYZ is worried that Company ABC will not be able to pay in full within 60 days. In order to ensure Supplier XYZ that it will make good on it payment, Company ABC gets a letter of credit from the bank stating that it will pay any outstanding liability within the set time period, with the bank acting as insurance in the event that it can’t meet its financial obligations.
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Hypothetical example(s) are for illustrative purposes only and are not intended to represent the past or future performance of any specific investment.
Investing in alternative assets involves higher risks than traditional investments and is suitable only for sophisticated investors. Alternative investments are often sold by prospectus that discloses all risks, fees, and expenses. They are not tax efficient and an investor should consult with his/her tax advisor prior to investing. Alternative investments have higher fees than traditional investments and they may also be highly leveraged and engage in speculative investment techniques, which can magnify the potential for investment loss or gain and should not be deemed a complete investment program. The value of the investment may fall as well as rise and investors may get back less than they invested.
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