Standby Letter of Credit

Standby Letter of Credit serves a different function than the commercial letter of credit. The commercial letter of credit is the primary payment mechanism for a transaction. The standby letter of credit serves as a secondary payment mechanism and is only used when a party defaults in their payment or performance obligations under the terms of a trade contract.

A bank will issue a standby letter of credit on behalf of a customer to provide assurances of his ability to perform under the terms of a contract between the beneficiary. The parties involved with the transaction do not expect that the letter of credit will ever be drawn upon.

The standby letter of credit assures the beneficiary of the performance of the customer’s obligation. The credit has an expiration date.

Benefits of an SBLC for the Importer:

  • Allows the Importer to establish a credit history with the exporter
  • Saves considerable money and time with repeat business because the Importer only needs to cover the maximum exposure risk of the exporter at any one time with one SBLC covering an entire year.
  • Easy to administrate and affordable
  • SBLC can be renewed, so it is flexible
  • SBLC ensures the delivery of goods or that the service or supplier performance will be provided in accordance with the terms of the trade contract
  • Ease of payment, the bank only needs to establish default of payment or performance from a few documents to establish this fact so that the exporter can be paid

Benefits of an SBLC for the Exporter:

  • Most reliable and simplest technique for the Exporter
  • Time is gained in export trade because documents are only checked in exceptional cases when the buyer has defaulted
  • Payment from the Importer is faster because once documents have reached the airport or port, by International Law only 3 to 7 days are given to review the documents and finalize the acceptance of the goods
  • Easy to administrate and affordable
  • Eliminates the problem of discrepancies, which occur 50% of the time using Documentary Letters of Credit (LC) as a payment mechanism, which can cause the payment to be delayed
  • Ease of Payment, the Bank only needs to establish default of payment or performance from a few documents to establish this fact so that the exporter can be paid