Stand By Letters of Credit – Good Investments or Bad?

Investing in stand by letters of credit is something that a lot of people consider. This type of investment can be a good investment if you are looking for something unique. It can also become a risk if you aren’t careful of how you go about things. Take the time to check out all of the different opportunities that you have to invest with these letters and talk to your financial advisor to determine what investment is going to be best for your specific needs. If you are able to get a bank to issue a standby letter of credit on your behalf, you can help third parties optimize their business and support other operations.

A standby letter of credit is designed to be issued to support your business or personal transactions. These letters allow you to protect your interest while engaging in contracts with a third party. There are many uses of these letters, including supporting the payment of obligations or contracts, optimizing cash flow and liquidity, maintaining capital, making new business relationships easier, and maintaining your investment strategy. When you employ the use of these letters by investing in stand by letters of credit, you can:

Secure business or personal real estate transactions 
Support credit enhancement or lease agreements 
Act as a substitute for performance bonds 
Expedite domestic and international trading

There are so many valuable assets to investing in this type of account with your money, but it isn’t for everyone. If you are looking for low-risk type investments with minimal involvement of third parties, this is obviously not the investment for you. People who are looking to invest while helping others, however, will benefit significantly from this type of investment. Think about risks that are involved including the following:

Decrease in market value that requires additional funding 
Assets being sold to meet collateral calls 
Demand of full payment at any time 
Full responsibility for the LMA account 
Restrictions that are applicable 
Adverse taxation consequences if assets are sold for more than they are purchased

These are just a few of the risks of investing in stand by letters of credit. If you take the time to review these risks and are able to minimize them or feel secure that they will not present an issue, you may find this to be a very useful investment vehicle. If it seems like too much work or risk is involved, you may want to stick to more traditional forms of investing.

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