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A Standby Letter of Credit is a guarantee of payment issued by a bank/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. They are very much like Documentary Letters of Credit, their main difference being that, unlike DLC’s, they only become operative in case the applicant defaults. At that point 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 banks’ 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 the lender gets paid, but while a standby letter of credit protects the lender, a bank guarantee protects both sides, since it also protects the borrower.
Standby Letters of Credit are a very flexible tool, making them a suitable product for securing a wide range of payment scenarios. A Standby Letter of Credit is created with actual money, not assets, unless a Bank can create an SBLC and put the money in the SBLC account based on assets.
Our lenders demand a Standby Letter of Credit, created by an A-grade bank. Therefore, it is important to know which bank you are working with.