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A financial standby supports a payment obligation. Think: invoice non-payment, lease payment default, loan repayment support, or settlement obligations under a supply contract.
Draw logic is usually tied to a failure to pay money due. The draw set is typically a demand and a statement of default, plus any narrowly defined additional documents.
A performance standby supports a non-payment obligation. Think: failure to deliver, failure to complete work, failure to meet milestones, warranty obligations, or contract performance covenants.
Draw logic is tied to non-performance, often supported by a beneficiary statement describing the breach and referencing the contract clause. The more “proof” the SBLC requires, the more likely it is to become unusable or disputed.
| Topic | Financial SBLC | Performance SBLC |
|---|---|---|
| Primary risk covered | Non-payment of money due | Failure to perform a contractual obligation |
| Common use cases | Lease payments, purchase price installments, invoice payment, settlement obligations | Construction and EPC performance, delivery performance, milestone completion, warranty support |
| Typical draw trigger | Failure to pay by a defined due date | Failure to perform as required by contract, often tied to a breach notice concept |
| Draw documents | Demand + beneficiary statement of non-payment (and any limited additional docs) | Demand + beneficiary statement of non-performance (avoid broad “proof” requirements) |
| Wording risk | Lower if payment schedule is clear | Higher if the contract is vague or milestones are hard to define |
| Bank underwriting focus | Applicant repayment capacity and collateral controls | Same credit focus plus higher dispute risk and contract interpretability |
| Beneficiary acceptance issues | Dates, amount, expiry, governing rules, place of presentation | Definition of “default,” evidence conditions, and whether the standby is practically drawable |
Your contract has a clear payment schedule and the beneficiary’s real fear is not getting paid. Examples: rent, deferred purchase price, invoice settlement, or a credit support requirement in a trade agreement.
If your contract is a trade deal and you are mixing tools, read Standby Letter of Credit vs Bank Guarantee to avoid instrument mismatch.
The beneficiary’s fear is that you will not deliver the work or goods as promised, or you will miss milestones. Examples: EPC, supply performance, or service-level commitments tied to a project schedule.
Performance standbys live or die on contract clarity. If milestones are vague, the standby becomes a dispute magnet.
A common failure pattern: the contract is about performance, but the standby is drafted as “non-payment.” The beneficiary rejects it, or it creates messy disputes at draw time.
Requests like “court order,” “engineer certification,” or “signed admission of default” can render the SBLC unusable. Banks also dislike vague, open-ended evidence requirements because they increase document examination risk.
Start from vetted formats: Standby Letter of Credit Wording Templates.
If the SBLC is drawn, the issuing bank expects repayment. That points to collateral margin, controlled proceeds, covenants, and clear recourse. The instrument type does not eliminate this.
For application basics, use How To Apply for A Standby Letter of Credit.
Ownership, counterparties, countries, and payment flows must clear compliance gates. If the beneficiary, applicant, or underlying transaction raises flags, the bank will pause or decline.
Common questions are covered in Standby Letters of Credit FAQ.
Submit the contract extract that describes the obligation, the beneficiary requirements, and your preferred wording. We will respond through the portal with feasibility and next steps.
Can a financial SBLC be used for performance issues?
It can be drafted to cover a broader range of obligations, but if the underlying risk is performance, the beneficiary will often require performance language. Trying to “force fit” a payment standby into a performance scenario is a common rejection trigger.
Which one is easier to issue?
From a drafting and acceptance standpoint, financial SBLCs are usually simpler because “non-payment” is easier to define than “non-performance.” Issuance still depends on credit approval, collateral, and compliance.
What rules should govern the SBLC?
ISP98 is common for standbys. Some beneficiaries request UCP 600, especially when the standby is tied to documentary trade flows. Your counterparty’s bank acceptance matters, so align this early.
Does the beneficiary need to provide proof to draw?
Banks examine documents for compliance with the SBLC text, not the underlying dispute. A clean draw set often uses a demand plus a beneficiary statement. Heavy “proof” requirements raise the chance of rejection or unusability.
Can the SBLC be amended after issuance?
Yes, if the SBLC allows amendments and both banks process them. Amendments can add time and cost, and some beneficiaries refuse instruments that allow unilateral changes by the applicant.
Where can I see example wording?
Start with Standby Letter of Credit Wording Templates , then tailor the draft to your contract schedule and beneficiary’s acceptance criteria.
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