{"id":16077,"date":"2023-01-22T09:50:00","date_gmt":"2023-01-22T09:50:00","guid":{"rendered":"https:\/\/businessyield.com\/?p=16077"},"modified":"2023-01-23T08:51:25","modified_gmt":"2023-01-23T08:51:25","slug":"standby-letter-of-credit","status":"publish","type":"post","link":"https:\/\/businessyield.com\/bs-business\/standby-letter-of-credit\/","title":{"rendered":"STANDBY LETTER OF CREDIT: Baby Steps To Better Understanding (+ Practical Examples)","gt_translate_keys":[{"key":"rendered","format":"text"}]},"content":{"rendered":"\n

Imagine a company involved in international trade that wants to sell a commodity to a buyer who they don’t know in person. What assurance do they have that the buyer will pay when the product is sent to him? Or what will be their fate if the supposed buyer decides to abscond with their product. This is why most seller demands a standby letter of credit. Hence hedging out the risk involved to a bank that will guarantee to pay if the buyer defaults or breach the agreement. This article will serve as a guide in showing the reader what is standby, and irrevocable standby letter of credit. It will also cover examples and samples of a standby letter of credit. Not leaving behind the difference between standby letter of credit vs letter of credit.<\/p>\n\n\n\n

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Photo Credit: Laptrinhx<\/figcaption><\/figure>\n\n\n\n

Relax, enjoy and learn. <\/p>\n\n\n\n

Keep reading!!!<\/p>\n\n\n\n

Let’s continue, shall we?<\/p>\n\n\n\n

What Is Standby Letter Of Credit<\/strong>?<\/span><\/h2>\n\n\n\n

A standby letter of credit(SBLC) is a legal document where a bank promises the payment of a particular amount of money to a seller if the buyer breaches the agreement. <\/p>\n\n\n\n

However, a standby letter of credit helps promote international trade between companies that don’t know each other and have diverse laws and regulations.  Indeed, the buyer is sure to receive the goods likewise the seller assured of his payment. However, a SLOC doesn’t guarantee the buyer will be comfortable with the product. <\/p>\n\n\n\n

Nevertheless, an SBLC serves as a protection for the payment of a shipment of physical goods or completed service to the seller. In the event, an unexpected circumstance prevents the buyer from making the scheduled payments to the seller. In such a case, the SBLC guarantees the needed payments are made to the seller after the realization of the required obligations.<\/p>\n\n\n\n

How Does A SBLC Works<\/strong>?<\/span><\/h3>\n\n\n\n

A SLOC is usually employed by a business to help it get a contract. The contract is a “standby” agreement because the bank will have to pay only in a worst-case scenario. Truly, an SBLC guarantees payment to a seller, however, the agreement must be followed precisely. For example, a delay in shipping or a misspelling of a company’s name can lead to the bank declining to make the payment.<\/p>\n\n\n\n

Additionally, since the people involved do not know each other, the letter ensures the seller\u2019s confidence in the transaction. It is a sign of good faith. Hence, it shows the buyer\u2019s ability to make payments for goods or services even if an unexpected event occurs.<\/p>\n\n\n\n

How Do You Get a SBLC<\/strong>?<\/span><\/h2>\n\n\n\n

The means of getting an SBLC are alike to a loan application process. The process begins when the buyer applies for an SBLC at a commercial bank. The bank will conduct its due diligence<\/a> on the buyer to evaluate its credit score, based on past credit history and the most recent credit report.<\/p>\n\n\n\n

 If the buyer\u2019s credit score is not worth it, the bank may demand an asset or the funds on deposit as collateral from the buyer before approval. However, the risk involved, the depth of the business, and the amount secured by the SBLC will determine the level of collateral. <\/p>\n\n\n\n

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Photo Credit: Slideshare<\/figcaption><\/figure>\n\n\n\n

Afterward, the buyer will also be asked to provide the bank with information about the seller, shipping documents required for payment, the beneficiary\u2019s bank, and the period when the SBLC is valid.<\/p>\n\n\n\n

Subsequently, after an evaluation of the documentation, the commercial bank will provide an SBLC to the buyer. Further, the bank will impose a service fee of 1% to 10% for each year when the financial document remains valid. However, if the buyer meets its requirements in the contract before the due date, the bank will end the SBLC without a further charge to the buyer.<\/p>\n\n\n\n

Finally, if the buyer fails to fulfill his agreement due to several reasons, such as bankruptcy, dishonesty, etc. The buyer’s bank expects the seller to provide all the required documentation listed in the SBLC within a specified period. Then the bank will make the payment due to the seller\u2019s bank.<\/p>\n\n\n\n

Now, let us discuss briefly some examples of a standby letter of credit.<\/p>\n\n\n\n

Standby Letter Of Credit Example<\/strong><\/span><\/h2>\n\n\n\n

This is a typical example of a standby letter of credit.<\/p>\n\n\n\n

For example, Mr. josh who resides in the US agrees to purchase 9000 pairs of sandals from Mr. Janv who resides in China. However, Mr. Janv prefers to avoid the risk, hence, he asks Mr. josh to get a standby letter of credit. Mr. josh obtains a standby letter of credit from WNE bank and he includes the following clauses \u2013<\/p>\n\n\n\n