Reasons To Use Standby Letter Of Credit In International Transactions
What Is A Standby LC?
A standby LC is a legal document issued by the bank or any other financial institution on the request of the importer guaranteeing on-time payment to the exporter in the event if the importer defaults on the agreement. A standby LC provides a safety net in international transactions and ensures on-time payment to the exporter for delivering complete service or a shipment of physical goods. It is issued by the banks where the two parties to the contract don’t know each other and the agreement involves risks of international trade such as distance or different laws and regulations etc.
The bank providing Standby LC services should be a neutral third party.
The buyer is assured to get goods & services and the seller is assured of getting payment but standby LC does not provide a guarantee regarding the quality of the goods.
Why Should We Use Standby LC In International Trade & Transactions?
The Standby LC is often used in international trade & transactions that involve a large requirement of money and associated risks. A standby LC provides several benefits in executing an international trade transaction. Some of the major benefits are here as follows:
Safe Business Expansion Globally - The first and foremost benefit of issuing Standby LC is that it establishes trustworthy relationships between the parties-to-the-contract who do not know each other or have not personally met or in case of newly established trade relationships. A standby LC promotes safe and reliable business expansion on a global level.
It Is Highly Customizable - Another benefit of issuing standby LC is that both the parties to the contract ie. importers and exporters can put their terms & conditions in the agreement after giving mutual consent. It can also be customized from one transaction to another with the same transaction partner.
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Seller Is Assured Of Payment - A standby LC ensures exporters that they will be paid on-time by the importers because in case if importers fail to do so, the exporter can show the evidential documents to the issuing bank. Then, the bank checks the documents submitted by the beneficiary to see whether they satisfy the terms and conditions of the contract specified in the LC and pays the full amount.
Proof of Creditworthiness For Buyer - A standby LC serves as legal proof of creditworthiness for the buyer and ensures the seller that the buyer is financially stable and in a condition to pay your amount. With this, the importer can execute multiple transactions at the same time when he is secured by a legal institution.
Seller Is Free From Credit Risk - A letter of credit is a safer and more financial tool for the sellers in the international market in case the buyer or importer gets bankrupt. As the creditworthiness of the buyer is shifted to the issuing bank, the exporter can recover his amount from the bank as agreed in the standby LC. Thus, a standby LC frees exporter from the payment and credit risk.
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