Standby Letter of Credit. What Is It and What Are the Benefits?

A standby lc is a document signed by the buyer’s bank that guarantees the beneficiary or the seller, that the former will make full payment for the goods and services, in case of bankruptcy or if the buyer is simply unable to make the payment.

A standby letter of credit is very useful for sellers who are entering into a trading transaction in an international market. Like any other letters of credit, these documents can be useful in protecting the clients from bankruptcy, failure of payment, unfavorable business laws, among others. Below we have listed a few advantages of using a SLOC.

What Are the Advantages Of SLOC?

Obligation - When a buyer and seller agree to enter into an agreement and signs a standby letter of credit, it makes sure that the buyer’s bank is under the obligation to make the payment to the seller in case the buyer is unable to meet the payment requirement or the deadline. The bank will also keep collateral while issuing a SLOC.

Buyer and Seller Agreement

Goals - In case the seller is a secondary mode of payment and if the payment is made through a standby letter of credit, then it means that the transaction has been unsuccessful and the buyer has either been declared unsuitable for business or is in unable to meet the deadline.

Time - These documents offer a long-term payment guarantee and have a validity of one or more years. These documents are ideal for a long-term business contract and are meant for businesses that are operating in different countries as well as the local market too. The time period of these documents begins with letting of the contract to completion or delivery of the goods and services.

Purpose - The main aim of the standby letter of credit is to provide long-term security for business transactions like construction projects, imports and exports of commodities, among others. When undertaking such a transaction the risks are higher as compared to short-term contracts.

Long-term Security Transactions

Geography and Cost - These types of letters of credit are not confined to any geographical borders. They are equally beneficial for both international and domestic transactions and the costs of these credits are more than any regular letter of credit. But these documents provide safety against both local and international laws of businesses.