What is a standby letter of credit?
A Standby Letter of Credit however is an instrument requiring a bank to assure payment to a third party beneficiary in the event of nonpayment or nonperformance by its customer. It has a wide range of uses including 1) guarantee of payment for goods or services 2) surety 3) escrow 4) bid/performance bond and 5) credit enhancement.
A standby letter of credit is a letter of credit that is issued in favor of the standby letter of credit beneficiary for the purpose of “backing-up” certain specified obligations of the standby letter of credit applicant. A standby letter of credit requires the beneficiary’s presentation of documents which indicate that the letter of credit applicant has not met the obligations which the standby letter of credit backs-up. A standby letter of credit, therefore, is not intended to be drawn upon by the standby letter of credit beneficiary unless the standby letter of credit applicant does not meet its obligations as specified by the standby letter of credit.
• A standby letter of credit is a letter of credit that is issued in favor of the standby letter of credit beneficiary for the purpose of “backing-up” certain specified obligations of the standby letter of credit applicant. A standby letter of credit requires the beneficiary’s presentation of documents which indicate that the letter of credit applicant has not met the obligations which the standby letter of credit backs-up. A standby letter of credit, therefore, is not intended to be drawn upon by the standby letter of credit beneficiary unless the standby letter of credit applicant does not meet its obligations as specified by the standby letter of credit.
Similar in many ways to a Commercial Letter of Credit, a Standby Letter of Credit represents a guarantee by the issuing bank to pay a specific sum of money to a named beneficiary. This payment is contingent upon specific terms and conditions of the credit specified in advance. The difference between the two instruments is that while a Commercial Letter of Credit is issued as a primary source of payment, the Standby Letter of Credit is typically issued as a backup source of payment or guarantee. The Standby Letter of Credit is usually intended to be drawn on only in the event of a default under the original payment agreement. Uses of Standby Letters of Credit Standby Letters of Credit are used in both domestic and international transactions. Common uses of the Standby Letter of Credit include: • Securing open account payment terms • In lieu of bid, performance and warranty bonds under contracts • Advance payment guarantee • To secure payment of a loan or other financial obligation Stand
A Standby Letter of Credit (called”SLC or “LC” ) are written obligations of an issuing bank to pay a sum of money to a beneficiary on behalf of their customer in the event that the customer does not pay the beneficiary. It is important to note that standby letters of credit apply only whenever the issuing bank’s commitment to pay is not contingent on the existence, validity and enforceability of it’s customer’s obligation; this is called an “abstract” guarantee; that is, the bank’s obligation is to pay regardless of any disputes between its customer and the beneficiary. The issuance of letters of credit is a private transaction and does not result in the issuance of any public trading securities. Why do we have standby letters of credit? The standby letter of credit comes from the banking legislation of the United States, which forbids US credit institutions from assuming guarantee obligations of third parties. (Most other countries outside of the USA continue to allow bank guaruntees.
