A letter of credit, or “credit letter” is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. (at least until the State reimburses the Town who finally reimburses the Bank – nonsensical in my opinion)
With letters of credit,the “promise and premise are ‘pay now, argue later.’ ”1
Letters of credit are meant to provide payment security that is both certain and mechanical, even if there is a dispute between the parties. Although performance bonds are more prevalent in the construction industry, letters of credit offer owners and contractors advantages that performance bonds do not:
Although performance bond sureties have no obligation to make payment unless a default has occurred, while banks that issue letters of credit typically must pay the beneficiary upon demand and without regard to the merits of a dispute concerning the underlying transaction.
Letters of credit are unique financial instruments, and the parties to any transaction involving letters of credit should be aware of the distinct body of law that governs them.
Although some contractors utilized a standby letter of credit, instead of a performance bond but it was rare. As you are aware, under a performance bond, if there is a default and the surety has to pay, the contractor ultimately will have to pay the bond amount or penalty or a difference between the new contractors pricing for the project DIRECTLY TO THE SURETY. There is no escape and bonds are not insurance.
The Bank Commercial Letter of Credit mainly was used in Worldwide or Ocean Marine whereby there were sight drafts and specific paperwork that had to be provided for the seller to get their money. And usually the buyer had the resources to ultimately pay the bank.
I think we need a short term loan of some type, knowing the State will ultimately provide the payment for the Kendrick Street Project; but what if it is delayed because of COVID 19; or because the State has known how we have violated LOFT funds which the Lake City DOT certainly is aware and makes a delay on purpose? Oh well, this should have been thought about before the Grant. We keep getting grants but in cases like this, we do not have the money when the work is performed by the contractor and so we do not perform our part under the contract by last money borrowing, etc until we are reimbursed. The Town needs to stop applying for Grants until we have some money in the bank, in my opinion.