Standby Letter Of Credit

Summary of Standby Letter Of Credit

A guarantee issued by a bank to a firm as security for the actions of a third party; in the event the third party does not perform specified acts (usually the payment of obligations) within a prescribed period, the beneficiary of the credit may unilaterally draw upon the letter of credit in satisfaction.

(Main Author: William J. Miller)

Standby L/C in International Trade

Meaning of Standby L/c, according to the Dictionary of International Trade (Global Negotiator): The standby letter of credit is very similar in nature to a guarantee. The beneficiary can claim payment in the event that the principal does not comply with its obligations to the beneficiary. Payment can usually be realized against presentation of a sight draft and written statement that the principal has failed to fulfill his obligations. A standby L/C can be used to back up a payment commitment. Therefore, an exporter may agree to sell on open account terms grating the importer 90 day credit terms on the condition that the importer open a standby credit in the exporter's favour. If the importer fails to honor the exporter's invoices, the exporter simply draws against the standby letter of credit. See letter of credit.