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A Letter of Comfort (LoC) is a non-binding document from a third party. Typically, this refers to a parent company or an affiliate. Its purpose is to show support for the borrower’s financial request. Banks often receive this letter during early loan discussions. The letter confirms awareness of the transaction, but not legal liability.
This LoC expresses moral support. However, it avoids committing to any direct financial obligation.
How Does A Letter of Comfort (LoC) Help Lenders?
Although not legally binding, comfort letters can still influence decisions. Lenders may view it as a sign of credibility. It shows that a stronger company is aware of and monitors the borrower. That can build trust, especially during risk assessments.
In some cases, the lender may proceed with the loan. This is more likely if the amount is small or moderate.
Comfort Letter vs. Company Guarantee
There is a clear difference between the two. A company guarantee creates legal and financial obligations, but a comfort letter does not. Guarantees are enforceable in court. Comfort letters explicitly deny legal responsibility.
Still, both documents are used in loan evaluations. One creates binding liability; the other offers moral assurance.
When Is It Useful?
Comfort letters are most useful during early financing talks. They can also serve while a formal guarantee is pending. Additionally, they help improve the borrower’s profile when no collateral exists.
They are also common in international banking and trade settings. However, banks do not accept them for high-risk loans alone.
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References
- Investopedia – “Letter of Comfort: Definition, Uses, Vs. Guarantee”
- Corporate Finance Institute (CFI) – “Comfort Letter”
- Sprintlaw UK – “Letter of Comfort in the UK: What to Know” …
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