Forums: Discussions for entrepreneurs and small business.

I have a great opportunity to pick up the pieces from a business that is about to go under and re-start it with a new focus, new strategy, and operational controls. The business sells high-ticket ($100k-400k) products. We have received the blessing of the manufacturer to take over the territory and have started discussions with 2 banks that offer inventory financing. Both are eager to get our business and both have strong relationships with the manufacturer.

We have a business plan, location, personnel, legal entity, etc. We just need to finalize approval of the inventory financing. And the one piece we are missing from our application is a "letter of credit". We don`t need a line of credit or even cash investment, but just a letter stating that a party will provide us with $150k of credit should we need it in the future. This credit would get tapped if we defaulted on loan payments to the inventory financing lendor, and that would trigger a loan from our investor.

I`m wondering if anyone in SUN has dealt with letters of credit before. I`m wondering about the process for actually executing a letter of credit between our investor and the financing bank. And also what I might expect to offer an investor in exchange for such a letter. Since the investor isn`t parting with the money, we don`t expect to offer much, but there is still risk on the part of the investor for which they should be compensated. Any relevant experience or sources of such a letter appreciated. Thanks.

Tack:

Your post confuses me somehow on the "letter of credit" part. I represent a specialized Trade Finance Company. In our line of work, we deal a lot with Letter of Credit (L/C) as we use it as our financing tools to our clients. But your explaination of L/C doesn`t sound like the one we are dealing with everyday.

In general, L/C is a commercial payment tool to ensure vendor gets paid after goods is shipped. It normal accompanies with a transaction/purchase.

In your post, it looks like your banker wants a Stand by LC which in fact it is a not commercial L/C. It is rather a cash payment guarantee. In the case of default term happens, the LC payment is automatically activated and the issuing bank of such stand-by LC has the obligation to pay. In turn, whoever provides you this stand-by LC will have to deposit 100% cash in issuing bank in case need to honor such obligation.

If your banker is lending against such stand-by LC, it is NOT realy lending. It is the one providing such LC who is lending here. Then why dont this guy lend to you directly as it actually trusts you so much?

Well, this post is more than half year old. I guess you have probably figured that out already. Hope it still helps, somebody.

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We are a finance company that is specialized to help you to purchase by supplying PO Financing

ming@horizon.us.com

Ming,

Saying that lending against an LC is not really lending isn`t quite correct. Of course if I needed a $100k standby LC in order to get a $100k loan, that wouldn`t make any sense at all. Standby LCs are usually a % of the total loan requested. So I got a $1.25MM line of credit to buy inventory but needed a $150k standby LC. The standby LC is used to guarantee interest payments; the inventory itself protects the principal.

I am indeed all set now, as I was able to raise the cash for the LC, providing my lenders a healthy return with a small amount of expense to the business. We are up and running and moving product. Thanks for the response.

Doug