Standby letters of Credit provide protection to buyers and sellers conducting business. They basically provide a guarantee to the seller that should the buyer be unable to pay for the transaction, the bank providing the letter assumes responsibility. In turn, the bank will take the burden of collecting the money from the buyer with interest included. Letters of credit can be issued in many situations, but standby letters only take effect if the buyer is unable to make payments. Investing in these letters can be risky business, but does collect a percentage of the amount at the creation of the letter plus the interest if the buyer doesn’t pay.

Letters of credit can protect the seller from a buyer that they feel uneasy about. This guarantees that they will get their money no matter how shady of a buyer they think they are dealing with. The letter can also be a protection to the buyer. The bank will make no payments unless the product purchased is actually received. The bank requires proof of delivery of the product in the form of shipping receipts. They are often used to secure international transactions. It can also be a loan management tool to keep a business liquid and can ensure that your securities can continue to be sold.

Many securities dealers use these letters of credit to ensure their securities. They can also be used by the buyers or traders of securities to ensure their value. The letter becomes an investment tool to protect assets. It can be tricky business, however. A careful study should be made of the terms of the agreement. More restrictions apply to standby letters purchased for investments than for other transactions. The letter does reduce the risk of an investment, but it can also be a false sense of security.

Some banks help you set up a management account for your investments that are secured by one of these letters of credit. Be sure to understand what will happen if a collateral call is made. This means that the bank may decided to sell securities in an account to help pay up the balances. The holder of the account does not necessarily have to be contacted or consulted about which securities it will sell to balance the account. It is better for the account holder to keep balances in control than allow the bank to do it.