Standby Letters of Credit: How to Use Standby Letters of Credit in Trade Finance
Standby Letters of Credit: How to Use Standby Letters of Credit in Trade Finance
A standby letter of credit(SBLC) functions as a safety net for payment obligations, providing assurance when buyers or performance obligations risk default. Unlike a documentary L/C, which pays against shipping documents, a SBLC triggers only upon beneficiary’s demand and presentation of a compliant drawdown certificate.
What Is a Standby Letter of Credit?
A standby letter of credit is a bank’s irrevocable guarantee to pay the beneficiary if the applicant fails to fulfill contractual obligations. It underpins lease payments, performance bonds, or payment defaults—making it a cornerstone of bankable trade finance.
Standby Letter of Credit vs Documentary Letter of Credit
Purpose & Draw Conditions
While a documentary letter of credit pays upon presentation of shipping documents, a SBLC only pays on default. It’s a contingency tool used as a payment fallback.
Governing Rules
SBLCs typically follow ISP98 (International Standby Practices) or URDG 758, whereas documentary L/Cs adhere to UCP 600.
Types of Standby Letters of Credit
- Performance SBLC: Guarantees project milestones, service-level or construction contracts.
- Financial SBLC: Secures payment obligations—rent, loan repayment or advance payment bonds.
- Bid Bond SBLC: Covers tender deposits in bidding processes.
How to Draft a Standby Letter of Credit Template
A clear standby letter of credit template includes:
- Issuing bank, applicant and beneficiary details
- Amount, currency and expiry date
- Documentary requirements for drawdown (e.g., statement of default)
- Governing rules clause (ISP98 or URDG 758)
- Beneficiary’s demand certificate format
Standby Letter of Credit Procedure: From Issuance to Claim
- Applicant applies and submits credit application to issuing bank.
- Bank conducts credit and KYC/AML due diligence on applicant & beneficiary.
- Draft-SBLC reviewed, negotiated, then issued to beneficiary through advising/confirming bank.
- Beneficiary presents compliant demand certificate upon applicant’s default.
- Issuing/confirming bank reviews documents; if compliant, pays beneficiary immediately.
- Applicant reimburses bank per agreement; interest/fees apply until reimbursement.
Benefits of Standby Letters of Credit for Suppliers & Buyers
- Suppliers: Payment certainty even if buyer defaults.
- Buyers: Replace costly cash deposits with contingent bank support.
- Banks: Diversify fee income and deepen client relationships.
Need a fully bankable standby letter of credit or expert guidance on how to use standby letters of credit in trade finance ?
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