It is a guarantee of payment issued by a bank on behalf of a client that is used as payment in case of default by the applicant.
Standby Letters of Credit are issued for use in a wide variety of commercial and financial operations. Standby letters of credit are very much alike documentary letters of credit, their main difference is that unlike DLC’s, they only become operative in case the applicant defaults, then the beneficiary in whose favor the SBLC was issued, can draw on the SBLC and demand payment.
Historically, Standby letters of credit were developed because the US regulator legally limited US bank’s authority to issue guarantees.
SBLC’s are very similar to demand guarantees, which also require that the presentation of stipulated documents be compliant with the terms and conditions of the guarantee. SBLC’s and guarantees are different in terms of protection, they both serve the primary purpose of making sure that sellers get paid, but while a standby letter of credit protects the seller, a bank guarantee protects both sides, since it also protects the buyer in case the supplier never ships the goods or ships them in a damaged condition.
Standby letters of credit are a very flexible tool, making them a suitable product for securing a wide range of payment scenarios.
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