Irrevocable Letters Of Credit
Irrevocable letters of credit are needed when you are dealing with a 3rd party entity, typically a government agency or middleman and there needs to be a guaranty of payment to them based on your business completing a contract provision.
For example: You are developing a parcel of land which is to include paved roadways, completed sidewalks, and street signs. You are in a dilemma. You need to begin selling some of the lots in the development, but you can’t get approval from the building department to start the sales process because you haven’t completed the paving and sidewalks.
You talk to the building department and as long as you deposit with them all the funds for the proposed improvements into an escrow account for them to control, they will let you begin selling lots. They are then assured the money is in place to complete the developments paving and sidewalks whether you finish them or not.
An alternative to the deposit of cash is the irrevocable letter of credit. This is a promise by you, guaranteed by the bank, to the building department that if you ultimately never complete the paving and sidewalks, the bank will pay the funds needed to do this directly to the building department by drawing against the irrevocable letter of credit. The bank secures the irrevocable letter of credit with other assets you own and files a lien on those assets. If the bank ever has to pay out funds under the irrevocable letter of credit, you have created a legal obligation to repay the bank and that obligation is secured by your assets.
This is a very basic example, but Irrevocable Letters of Credit are used for many purposes and usually as a substitute for a direct payment of cash to a 3rd party to guaranty performance of a contractual obligation.
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For more information call or visit any Anchor Bank location or call us at 360-532-6222 or toll-free at 800-562-9744 for a quote and application package.
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