Which instrument may fulfill the initial $20,000 financial security requirement for a new ARC agency?

Which instrument may fulfill the initial $20,000 financial security requirement for a new ARC agency?

• A. A letter of credit
• B. A cash deposit
• C. A bank loan from ARC
• D. A personal guarantee

Answer: (A)

ARC requires new agencies to provide a form of financial security that guarantees coverage of charges. A letter of credit fits this need because it is a bank-issued guarantee for the specified amount that ARC can draw on if the agency fails to meet its obligations. It’s usually irrevocable and payable on demand, giving ARC immediate protection without the agency having to part with cash upfront. This preserves the agency’s liquidity while still giving ARC solid recourse through the bank. A cash deposit would also work as security but ties up the agency’s funds, reducing liquidity. A bank loan from ARC isn’t a form of security to protect ARC, and a personal guarantee relies on an individual’s ability to pay, offering less reliable coverage. So the most reliable, ARC-accepted form is a letter of credit.

ARC requires new agencies to provide a form of financial security that guarantees coverage of charges. A letter of credit fits this need because it is a bank-issued guarantee for the specified amount that ARC can draw on if the agency fails to meet its obligations. It’s usually irrevocable and payable on demand, giving ARC immediate protection without the agency having to part with cash upfront. This preserves the agency’s liquidity while still giving ARC solid recourse through the bank. A cash deposit would also work as security but ties up the agency’s funds, reducing liquidity. A bank loan from ARC isn’t a form of security to protect ARC, and a personal guarantee relies on an individual’s ability to pay, offering less reliable coverage. So the most reliable, ARC-accepted form is a letter of credit.