Starting a business or expanding it to reach global markets takes vast amounts of capital. Venture capitalists can provide this kind of financial backing, but part-ownership of the company is demanded in return, usually in the form of shares of stock in the company. Those who wish to get working capital but want to retain ownership and control can seek a SBLC, a pledge of repayment to the lender if the principal defaults.
A Stand By Letter of Credit is part of high finance, far beyond the scope of most investors. This kind of document is used by banks, insurance companies, hedge funds, pension funds, and other big players. Huge amounts of money are moved around by these financial institutions. The process might affect the portfolios of the average investor, but understanding the transactions is not really necessary.
The reputation of the bank or financial entity issuing the Letter of Credit (LC) is the backing for the document. In itself, a LC has no value. The transaction is similar to having a co-signer on a mortgage or a car loan - only on a much larger scale. In both instances, the backer hopes never to be called on to repay a loan or fulfill the terms of a contract.
Banks will never issue this sort of guarantee unless there is complete confidence in the client's ability to repay or to complete a contract. Information posted online differs on the prevalence of such pledges. Some posts say that they are very rare and may even be a signal for 'Investor beware'. Others promise expert handling of this kind of transaction, with benefits to all parties concerned.
This kind of transaction often accompanies a 'private placement' of securities. This is an 'invitation only' opportunity for large investors to buy stock, bonds, promissory notes, and such; the public at large cannot take advantage of the offering. Securities may be issued by a public company, but this 'private sale' does not come under the regulatory oversight of the Securities and Exchange Commission.
When things are done on an international scale, it's even more complicated. For example, there is a lot of wealth in the United Arab Emirates, a Middle Eastern country made up of seven emirates (principalities) headed by powerful families. One of the emirates in this federation is Dubai, a name familiar to many of us. Wealth of this kind can invest in private offerings or attract investors to its projects.
The high finance of very rich individuals, nations, or organizations makes the financial world go round. Like all investments, there is risk as well as reward. The Letter of Credit (LC) is not meant to be used; it's a 'last resort' pledge to repay or fulfill contractual obligations that gives a company the scope to work and succeed. Often success requires an initial infusion of funds long before significant returns are realized.
Of course, this is all academic unless you have ten million dollars or more to invest or need that much or more. Those of us who deal in hundreds and thousands will never need a LC. However, it's fun to learn more about this shadowy world - maybe for a novel about a financial struggle on an international scale, where it's hard to tell the good guys from the bad.
A Stand By Letter of Credit is part of high finance, far beyond the scope of most investors. This kind of document is used by banks, insurance companies, hedge funds, pension funds, and other big players. Huge amounts of money are moved around by these financial institutions. The process might affect the portfolios of the average investor, but understanding the transactions is not really necessary.
The reputation of the bank or financial entity issuing the Letter of Credit (LC) is the backing for the document. In itself, a LC has no value. The transaction is similar to having a co-signer on a mortgage or a car loan - only on a much larger scale. In both instances, the backer hopes never to be called on to repay a loan or fulfill the terms of a contract.
Banks will never issue this sort of guarantee unless there is complete confidence in the client's ability to repay or to complete a contract. Information posted online differs on the prevalence of such pledges. Some posts say that they are very rare and may even be a signal for 'Investor beware'. Others promise expert handling of this kind of transaction, with benefits to all parties concerned.
This kind of transaction often accompanies a 'private placement' of securities. This is an 'invitation only' opportunity for large investors to buy stock, bonds, promissory notes, and such; the public at large cannot take advantage of the offering. Securities may be issued by a public company, but this 'private sale' does not come under the regulatory oversight of the Securities and Exchange Commission.
When things are done on an international scale, it's even more complicated. For example, there is a lot of wealth in the United Arab Emirates, a Middle Eastern country made up of seven emirates (principalities) headed by powerful families. One of the emirates in this federation is Dubai, a name familiar to many of us. Wealth of this kind can invest in private offerings or attract investors to its projects.
The high finance of very rich individuals, nations, or organizations makes the financial world go round. Like all investments, there is risk as well as reward. The Letter of Credit (LC) is not meant to be used; it's a 'last resort' pledge to repay or fulfill contractual obligations that gives a company the scope to work and succeed. Often success requires an initial infusion of funds long before significant returns are realized.
Of course, this is all academic unless you have ten million dollars or more to invest or need that much or more. Those of us who deal in hundreds and thousands will never need a LC. However, it's fun to learn more about this shadowy world - maybe for a novel about a financial struggle on an international scale, where it's hard to tell the good guys from the bad.
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