Difference Between Standby LC And Letter Of Credit
What Is A Letter Of Credit?
A letter of credit or a documentary credit is a legal document issued from the bank to the exporter on behalf of the importer/applicant where it promises that the importer will fulfill his contractual obligations and pay the exporters on-time. In the event, if the buyer defaults, the full or remaining amount will be reimbursed by the issuing bank. In short, the issuing bank ensures that the buyers pay on-time.
What Is A Standby Letter Of Credit?
On the other hand, a Standby LC is a secondary payment method where the bank promises that the exporter will be paid on-time in the event if the buyer defaults and unable to pay as long as the exporter submits the proof that all the terms & conditions have been met by him. It provides additional safety to the sellers. There can be multiple reasons behind the buyer’s default such as cash flow inadequacy, or bankruptcy, etc. But only comes into action when the seller meets the requirements of the Standby LC agreement.
Standby LC V/s Letter of Credit
Both Standby LCs and payment guarantee letters are backed by a legal institution like a bank or a public financial institution on the request of the buyer to ensure their suppliers on-time & full-fledged payment while executing international trade deals. If you also want to apply for the letters of credit and are looking for Letter of credit service providers, here are some key differences which you need to keep in mind. Let’s have a look:
1. Addition of Special Features - Unlike a standby letter of credit, a payment guarantee letter does not contain a set of special features or requirements imposed by the buyer for the seller to be completed while executing the deal. On the contrary, in case of issuance of a standby payment guarantee letter, the buyer is allowed to impose some specific clauses to the agreement which a seller needs to fulfill. It can be about the number of goods or packaging requirements etc.
3. Purpose of Issue - The ultimate goal of issuing a payment guarantee letter is to ensure that the transaction goes as planned throughout the process, so it is a primary instrument of payment. It is the standard payment document used in international trade to assure as well as to secure the seller that the buyer will fulfill his promises. While, on the contrary, an SBLC is a secondary instrument of payment as the word suggests itself.
Both SBLC and LC are the extensively used trade finance instruments in the international market as well as domestic trade transactions. Both are issued by the bank at the request of the buyer or importer in the favor of the exporter to assure the payment for the delivered goods & services.