What is a Standby Letter of Credit? - Business Active
  • г. Москва, Пресненская Набережная, д. 6 стр. 2, Башня Империя, этаж 8, офис 32
  • pp@lcterms.com

What is a Standby Letter of Credit?

Letter of Credit is a common way of payment in International trade, they back up a deal and offer a good balance of security between the buyer and the seller. 
You are one of our key partners, and we would like to discuss this system as a favorable option to realize upcoming orders and potentially expand our cooperation in the future. 
We have got an opportunity to arrange Stand-by Letter of Credit from one of international banks, what gives new possibilities to develop business.

A standby letter of credit is a specialised letter of credit which does not generally involve specific shipments of merchandise as in the case of a commercial letter of credit. Instead, it is also used to support the performance or fulfilment of contractual terms. Unlike other letters of credit, a standby is generally drawn against only if there is failure to perform on the part of the account party.

When a trade relationship is established between an importer or exporter on “open account”, a standby in favour of the exporter, can be used as financial security. Standby Letter of Credit is a written obligation of an issuing bank to pay a sum of money to a beneficiary if a customer does not pay in time. In case of the buyer’s default the bank completes the payment upon first demand regardless and without objections or defenses of any disputes between its customer and the beneficiary. 
Standby Letter of Credit is used as a way to protect the supplier against the risk of non-payment balance. So the goods can be delivered before the payment is completed. 
There few main stages in the process:
1. SBLC draft offered from an issuing bank and its discussion (maximum 10 working days, the process can go faster);
2. SBLC issuing preparation (5 working days, the process can go faster);
3. SWIFT delivery to the beneficiary bank (5-8 working days);
4. Pre-payment from the buyer and goods production;
5. Goods delivery and documents sending;
6. Payment completed by the buyer after agreed deferral.
Standby Letter of Credit makes the operations run more smoothly and fast as the original documentation is sent from the seller to the buyer directly without intermediaries. All the documents after delivery are exchanged directly between a supplier and a buyer.

If a supplier decides to ask for the payment from an issuing bank, he provides the documents as per SBLC terms to his bank, which is going proceed the claim on his behalf.

Letter of credit covers the cost of goods equal to the amount which it was opened for.

The total amount of the goods delivered shall be tracked by a supplier and a buyer. When a buyer pays the balance for the previous delivery, the paid amount is counted as the balance of SBLC to be used again.