Standby Letter of Credit
It is a guarantee of payment issued by a bank or financial institution 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.
Work's Process
1
Applicant
Applicant is the party who opens Letter of Credit. Normally, buyer of goods is the Applicant who opens letter of credit. Letter of credit is opened as per his instruction and necessary payment is arranged to open Letter of credit with his bank. The applicant arranges to open letter of credit with his bank as per the terms and conditions of Purchase order and business contract between buyer and seller. So Applicant is one of the major parties involved in a Letter of credit.
2
Beneficiary
Beneficiary is one of the main parties under letter of credit. Beneficiary of Letter of credit gets the benefit under Letter of credit. Beneficiary is the party under letter of credit who receives amount under letter of credit. The LC is opened on Beneficiary party’s favor. Beneficiary party under letter of credit submits all required documents with is bank in accordance with the terms and conditions under LC.
3
Issuing Bank
Issuing Bank is the bank who opens letter of credit. Letter of credit is created by issuing bank who takes responsibility to pay amount on receipt of documents from supplier of goods (beneficiary under LC).
4
Advising Bank
Advising bank is another party involved under LC. Advising bank, as a part of letter of credit takes responsibility to communicate with necessary parties under letter of credit and other required authorities. The advising bank is the party who sends documents under Letter of Credit to opening bank.