Board Topic: What is a standby letter of credit?
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What is a standby letter of credit?

Posted by: Ricardo T. Feb 2 2004, 01:55 PM
I read your page on standby letters of credit, but I am still confused can you give me more information.

Thanks, Ricardo

Posted by: loanuniverse Feb 2 2004, 09:21 PM
Well my knowledge of letters of credit is limited, but let me see what I can do.

In simple terms, a standby letter of credit is an assurance that your company has the financial resources to perform as agreed under contract - whether that is to provide products or services or to make payments for goods, supplies, loans or other indebtedness. The issuing Bank essentially substitutes its credit standing for that of your company in order to facilitate the trade transaction or contract.

Standby letters of credit are powerful tools that due to their relative lower cost are sometimes preferred over traditional guarantees like surety and performance bonds. Companies turn to banks for standby letters of credit to comply with payment or performance terms of a contract. . Standby letters of credit are legal documents that support contractual agreements between two parties. The standbys are concerned only with the contractual agreement you have made with another party and are payable only when the appropriate documentation as outlined in the letter of credit is presented by the beneficiary. At the same time, the letter of credit is flexible enough to be amended with the beneficiary's consent to reflect any changes in the contract agreement with the customer or supplier.

Some uses of standby letters of credit:

1 Replacement of Bid, Surety or Performance Bonds.

2 Substitution for Advance Payments and Cash Deposits.

3 Guarantee of loan repayments.

4 Utility company deposits

5 Invoice payment guarantee

6 Assurance of refund of advance payments if contract terms are unmet.


Hope this helps.
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