Letter of Credit Cash Drag Calculator

Standby letters of credit often trap millions in a zero-yield escrow. Enter the pledged cash, your alternative yield (such as a Treasury bill ladder), and the bank’s LOC fee to see how much interest income you’re surrendering, what the monthly drag looks like, and the basis-point hit to working capital.

Total cash the bank requires to secure the letter of credit.
What the cash could have earned in a money market or T-bill sweep.
Defaults to 12 months if blank.
Defaults to 0.75% annually if left empty.

Consult treasury and legal teams before modifying collateral requirements. This tool approximates cash drag and does not replace bank statements or GAAP reporting.

Examples

  • $2.5M collateral, 4.75% alternative yield, 12 months, 0.75% bank fee ⇒ Lost yield over 12.00 months: $118,750.00 USD • Bank fee impact: $18,750.00 USD • Total carrying cost: $137,500.00 USD • Monthly drag: $11,458.33 USD • Annualized opportunity cost: 550.00 bps
  • $800k collateral, 5.25% yield, 6-month construction period, 1.25% fee ⇒ Lost yield over 6.00 months: $21,000.00 USD • Bank fee impact: $5,000.00 USD • Total carrying cost: $26,000.00 USD • Monthly drag: $4,333.33 USD • Annualized opportunity cost: 650.00 bps

FAQ

What if the bank only requires 50% cash collateral?

Enter just the portion of the letter backed by cash. If the remaining exposure is guaranteed by securities or receivables, keep it out of the input so you model only the trapped cash.

Can I include non-utilization fees?

Yes. Add any standby or non-utilization rate to the LOC fee field so the calculator captures every percentage charged on the outstanding face value.

How do I model a revolving letter of credit?

Use the average collateral posted across the year and extend the holding period to 12 months. That smooths seasonal draws and provides an annualized view of the drag.

Additional Information

  • Carrying cost equals the lost investment return plus the bank’s percentage fee on the face amount of the letter of credit.
  • Annualized basis points show how much incremental APR the tied-up cash effectively costs relative to the collateral posted.
  • Shorter holding periods reduce absolute dollars but can still hurt because banks often require posting the full amount months before a project starts.

Related calculators