Letters of credit can be used in many innovative ways. Some of the ways innovative credit professionals have found to make sales happen by using a letter of credit are:

1. To guarantee that payment will be made or performance of certain requirements will be completed after a contract or bid has been awarded
2. To advance funds to the seller by the purchaser for the purchase of materials for a project
3. To back up the obligations of the seller should it not perform in accordance with the conditions outlined in a contract
4. To provide assurance during a warranty period that a project will run smoothly after completion
5. To back up underwriting obligations
6. To allow a company to self-insure for potential workers’ compensation claims
7. To collateralize a loan repayment or interest payments when, without the letter of credit, the loan might not have been given or a higher interest rate might have been charged
8. To securitize a company’s accrued vacation liability in order to accelerate the expense on its financial statements
9. To help companies with local bid requirements for guarantees issued on the strength of the issuing bank’s letter of credit in foreign countries
10. To help companies backstop their environmental cleanup liabilities
11. To improve the credit ratings of securities, bonds, notes, or commercial paper supported by a letter of credit
12. To mitigate portfolio risk when securitizing assets
13. To encourage investment in an area by enabling companies to access less costly tax-exempt financing
14. To subsidize investment in equipment that will protect the environment with tax-exempt financing
15. To backstop a state’s obligation when it issues notes that will later be repaid through taxation and also to provide a liquidity facility
16. To back up a commercial paper program that will provide lowcost, short-term financing and a liquidity facility, often enabling the program to obtain a higher-quality rating than it might have been able to obtain without the letter of credit