Letters of Credit v. Security Deposits

Posted by on November 5, 2013 at 11:29 pm.

By Dana Farmer. Smith Knowles, PC

Some creditors find that maintaining security deposits for marginal customers is a convenient method to protect against default. However, security deposits are still considered to be the property of your customer and if the customer files bankruptcy the bankruptcy trustee has the authority to take the security deposit. Therefore, as an alternative to the security deposit, you can use a letter of credit. If your customer has enough money to give you to hold as a security deposit, then they could also deposit that money with the bank in exchange for a letter of credit.

Once the bank has the money, it can issue a letter of credit which you would be able to use to apply to any deficit. Since the money is then deposited with the bank, the bank bears the risk of losing the money to a bankruptcy trustee. Yet, since the letter of credit is between you and the bank, your customer’s bankruptcy . . . read full article

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