What Is A Standby Letter Of Credit? Definition And Its Types

Axios Credit Bank
3 min readAug 26, 2020

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What Is A Standby Letter Of Credit?

A standby letter of credit (LC) is a legal financial instrument issued by a bank on the behalf of the buyer guaranteeing on-time payment to the seller of the said amount only if the seller presents all the specified documents proving that buyer is not capable to pay the seller or at the default of non-fulfilling the terms and conditions of the contract.

A standby letter of credit brings a safety measure to the seller ensuring payment for a completed service or shipment of physical goods. It provides a guarantee to the exporter that if the importer is unable to pay due to any circumstances, then the importer’s bank will make the payment to the beneficiary ie. exporter. Let’s find out about Standby letter of credit in detail:

Types Of Standby Letter Of Credit:

There are two main types of Standby letter of credit:

  1. Financial — Financial SLC is an irrevocable undertaking by the bank which ensures that the bank will make the payment to the beneficiary if the purchaser is unable to meet the financial obligations of the contract. In short, this type of Standby letter of credit supports an obligation to pay the money including any instrument proving an obligation to repay the borrowed money.
  2. Performance — This type of Standby LC is an irrevocable undertaking by the bank where a bank ensures the beneficiary to pay the amount if the purchaser is unable to fulfill any contractual obligation such as Terms and conditions. In short, this type of SLC supports the fulfillment of performance and the bank makes half payment to the beneficiary in case the purchaser fails to make the payment.

Other Types Of Standby LC:

Apart from these two main types, there are some other types of Standby LC. It includes:

  1. Advance Payment Standby
  2. Bid Bond/Tender Bond Standby
  3. Counter Standby
  4. Direct Pay
  5. Insurance Standby etc.

How Does A Standby Letter Of Credit Work?

We can understand the entire process of Standby LC by an example. Let’s imagine that ABC Ltd, an exporter from India, received an order to send goods to XYZ Ltd, a Foreign company from the UK. The exporter from India wants to protect his organization and demands an assurance from XYZ Ltd regarding the on-time payment for the shipment of goods. Therefore, XYZ Ltd issues a standby LC in favor of ABC Ltd mentioning that if XYZ ltd fails to make the payment to ABC due to any circumstances, ABC Ltd can claim the credit on this SLC by submitting the documentation to the importer’s bank.

Benefits of Standby Letter of Credit:

A Standby Letter of Credit is mostly used in International Trades. It is customizable and decreases credit risks. Here are some of the benefits of Standby LCs. Let’s have a look:

  1. A standby LC is very helpful to initiate transactions with the unknown parties or to establish a new trade relationship in the global market. It provides safety and security to the beneficiary regarding the on-time payment of goods.
  2. These standby letters of credits can be customized as per the requirements. Both of the parties i.e. sellers and buyers can put their terms and conditions and can make the contract full of clauses.
  3. It plays an important role in establishing a trust relationship between two unknown parties in different countries.

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Axios Credit Bank
Axios Credit Bank

Written by Axios Credit Bank

Axios Credit Bank is an international bank that provides a wide range of financial services to individuals and businesses worldwide. axioscreditbank.com

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