• Letters of credit reduce your borrowing capacity at your bank and create a contingent/balance sheet liability. Further, the letter of credit will consume its portion of the legal limit your bank may lend your business.
  • Bonds are cost effective.
  • Almost always, banks will require specific assets to be pledged to secure the ILOC.
  • In the case of a claim/dispute the “standby” Letter of Credit is callable by the state or federal agency upon demand — no questions asked. When this happens the bank pays over to the agency the amount of the letter of credit. However, the surety bonds and issuing insurance companies have duties and responsibilities to resolve any disputes in an equitable manner protecting your rights. This rule contrasts sharply with a letter of credit which simply pays over a sum of money on demand.