Banking · Credit Facilities
In the context of corporate credit facilities, how does a Letter of Credit (LC) primarily differ from a Cash Credit (CC) facility regarding the bank's financial commitment?
Verified Solution4 OptionsUpdated: October 2026👁️1 View
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- 1A Letter of Credit is always an unsecured facility with no collateral requirements, while Cash Credit is strictly tied to the purchase of long-term fixed assets like land and buildings.
- 2Cash Credit is a contingent liability for the bank that never results in actual cash outflow, whereas a Letter of Credit requires upfront payment at the time of sanction.
- 3In a Letter of Credit, the bank provides immediate liquidity to the borrower for day-to-day expenses, whereas Cash Credit is only used for international trade transactions.
- 4A Letter of Credit is a non-fund-based facility where the bank's payment obligation is contingent upon the submission of specific documents, while Cash Credit is a fund-based facility involving direct withdrawal of money by the borrower.✓
Correct answer
A Letter of Credit is a non-fund-based facility where the bank's payment obligation is contingent upon the submission of specific documents, while Cash Credit is a fund-based facility involving direct withdrawal of money by the borrower.
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