Standby Letter of Credit
A standby letter of credit is a written obligation issued by the bank on behalf of its clients. In the event that the client fails to fulfil their financial obligations. Unlike traditional payment instruments, SBLC functions as a secondary payment method, a form of abstract guarantee, which means the bank’s responsibility to pay is independent of any underlying disputes between the buyer and the seller.
Key Benefits of a Standby Letter of Credit
Who Are the Parties to the Standby Letter of Credit?
1. The Applicant
2. The Issuing Bank
3. Beneficiary
4. Confirming Bank
5. Advising Bank
Purpose of an SBLC
The main purpose of a standby letter of credit is to act as a guarantee of payment. It works similarly to a bank guarantee, with the payment on the first demand and without any objections related to the underlying contract. It is up to the beneficiary to decide whether they may accept a standby.
What Are the Types of Standby Letters of Credit?
Advance payment, standby
Direct pay standby
Performance standby
Commercial standby
Tender standby
Insurance, standby
Assignment of proceeds :
A beneficiary can assign the proceeds of the SBLC to a third party. Only the original beneficiary may demand payment unless the instrument specifically allows otherwise. The issuing bank was notified of such an assignment.
Transfer of SBLC
SBLC can be transferred to a third party only with the written consent of the issuing bank and the beneficiary.
SBLC does not have CUSIP or ISIN numbering. Standby letters of credit are not trading securities or trading investment funds, and therefore, they are not subject to the rules and regulations of the Securities and Exchange Commission.