A Comprehensive Guide On The Standby Letter Of Credit

 What is a standby letter of credit?

Know the global set of rules which govern the standby letter of credit. Using the financial instrument will offer the assurance of payment from the undertaking issuer. (Here issuers are often banks)

The SBLC is the underlying contract or agreement between the issuer’s client (In terms of SBLC we can say that the client is referred to the applicant) and the client’s contract counterparty (In terms of SBLC we can say that the counterparty is referred to the beneficiary).

When the issuer bears a stronger credit rating, the SBLC can be obtained easily from the bank. An applicant can apply for a bank guarantee after checking if they have a good credit score or not. the SBLC may include the reference to the underlying contract between the applicant and beneficiary – the issuer’s obligations remain fully independent of the underlying contract which will be supporting.

However, know that SBLC will simply expire in accordance with the SBLC’s stated expiry period or date. This is because the applicant successfully completes their contractual obligations and when the beneficiary will have no reason to demand payment under the SBLC.

Benefits of using the standby letter of credit:

 The bank’s standby letter of credit substitute as well as enhance or replace the creditworthiness of the applicant so that the bank can offer the banking instrument.

 The SBLC will help in any type of contract or trading.

 Since SBLC is recognized globally as an effective tool it means securing cross-border and domestic contracts.

How can the SBLCs be used commonly?

You can easily get the bank guarantee for the reasons which are mentioned below:

The financial SBLCs are issued to back the financial obligations or some form of any indebtedness such as loan repayment or irrevocably obligate the issuer in the event of the applicant fails to honor the payment obligation. Also, the performance SBLC is used which is used as a backup for the company’s performance related to the duties. These are contractual, non-financial obligations and irrevocably obligate the issuer in the event of the applicant fails to perform as agreed.

Parties involved in getting the bank guarantee:

1. Applicant – When a contract is required, the party who reaches the bank to get the financial instrument is the applicant. The applicant will have different names here as borrow, buyer, etc.

2. Beneficiary–It is the party that receives all the benefits of the SBLC. They can receive the payment against the SBLC or get the required payment involved in the transaction. The beneficiary here is the seller, lender, etc.

3. Bank – Confirmation may be offered only at the request of the applicant. One can apply for a standby letter of credit at the bank and the bank is the party or issuer who offers the financial instrument to the applicant. The bank will verify the background of the applicant and then process the request so that they can offer the financial instrument to the applicant.