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What is a Standby Letter of Credit?

The Standby Letter of Credit (SBLC) can be defined as a letter of credit. Also referred to as a documentary letter of credit, the term is widely used for securing payments across national and international trading. SBLC is issued by a recognized financial institution, usually when a buyer requests for it. It is important that the buyer provides requisite instructions for preparing documents.

Traditional Use of Standby Letter of Credit

Primarily, a standard SBLC (commercial) is used for global trade finance transactions of significant value. These may include:
- Trade dealings between a provider from a specific region and a client from another
The process usually delivers payment bank undertaking (irrevocable).
On the other hand, there are a number of other purposes and practices of SBLC. Here’s how it can be used:
- It can be used for making payment on a transaction.

- Once redeemed, this letter compensates exporter.
- SBLC may be used towards land development work for guaranteeing construction of only approved public settings and installations such as storm water system ponds, sidewalks, streets etc.

Letter of credit is mainly a beneficiary who will get the money. Its issuing bank applier serves as a client. Its advising bank beneficiary is a client.
As per the International Chamber of Commerce (ICC) within the Uniform Custom and Practice for Documentary Credit (UCPDC), a letter of credit is defined as follows:
- It is an arrangement, whereby the issuing a bank acts on the appeal and upon instructions of the client (the Applicant). It may even act on its own:
- Makes a payment towards the beneficiary (order third party). It may also play a crucial role in accepting drafts (bills of exchange) drawn by the beneficiary.
- Authorized a different bank to influence such payments or even accept as well as pay similar drafts (bills of exchange).
- Authorized a different bank for negotiating against specified documents on condition that all terms are adhered to.

When it comes to a Standby Letter of Credit, banks will deal ONLY in goods or documents. They will not involve themselves in contracts and commitments made between two parties directly. Issuing bank is mainly concerned about the terms and conditions ruling the policy of letter of credit. The crucial decision of making payments by an SBLC will be based mainly on whether or not the documents submitted to bank complies with the pre-defined terms of SBLC.

This is different from a traditional letter of credit wherein the beneficiary gets payment against papers representing delivery. Here, the SBLC may sanction payment to a beneficiary from any financial institution despite the fact that the applier for credit has been neglecting to perform according to the bond.

The SBLC was initially used by depository financial organizations in the United States of America. It is quite similar to a bank guarantee. Under this situation, the primary goal of writing out this credit is to secure bank loans. The bank of applier cuts Standby Letters of Credit within the country of the applicant and then imparted to the beneficiary through a bank in the country of the beneficiary.

Lease Standby Letter of Credit

A wide range of formats and delivery methods are available for Standby Letter of Credit. Most of these mainly offered with domestic and foreign bank accounts setup. These may also be available for overseas private trust accounts. You can even enhance your credit profile via collaborating (joint venturing) with the SBLC providers.

Most providers offer cash accounts for Standby Letter of Credit issuance. These may be prepaid for varied terms as per the rules of a company or as longer as needed by the client. It is important that you check the providers for the terms and conditions and ensure desired results. 

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