Standby letters of credit – Introduction

A standby Letter of credit is also known as a non-performing letter of credit. A standby Letter of credit is a type of guarantee of payment that is offered by a bank on the behalf of a client. If the client however fails to make the payment then the bank is supposed to take care of the expenses. Standby letter of credit ensure that the payment even if is not provided to the supplier is taken care of by the bank itself. There are no discrete steps involved in a standby Letter of credit. They do not support any kind of discrete trade transactions. Bank issues a standby Letter of credit for the concerned client that means that the bank is ready to vouch for the client and is ready to bear expenses on his par. If in any case the client is unable to pay to the beneficiary then that payment is done by the bank itself. It is just like giving a guarantee to the beneficiary that the bank’s client would make the payment and if not then the bank could always be approached. Banks may stand behind monetary obligations and might ensure the refund of the advance payment as well. The banks might also assess the performance and support it as well. They might also bid obligations and also see to it that a particular sales contract has whether successfully completed or not. Thus the banks might ensure the completion of the sales contract as well.

Standby Letters of credit also known as non-performing letters of credit see to it that the transaction between the beneficiary and the buyer gets completed in a proper time period or not. SLOC or SLC is generally used to describe a Standby Letter of credit. The abbreviation is used in most of the cases.

Standby Letters Of credit-Uses and Benefits

There are quite a number of reasons as to why a company or any other business entity may opt for a standby letter of credit. However, the main reason why the use of standby letters of credit in facilitating international deals is the guarantee they give on payments. A standby letter of credit guarantees the payment to the seller/exporter of goods or services. This is irrespective of whether the business deal goes smoothly or not.

Standby letters of credit enhance various transactions relating to third parties. Banks use standby letters of credit in executing their obligatory duties concerning third party payments. This normally occurs when the buyer does not honor the payment agreement.

Those wanting to finance construction of residential houses can utilize a standby letter of credit. The cost of housing and other related infrastructures may adversely affect a large portion of much of a company’s equity base. Therefore, a well-structured standby letter of credit will ease this economic burden.  Standby letters of credit also enhances good management of a company’s assets and liabilities. Improper management of these two economic fundamentals can lead to huge losses for the firm. This eventually can lead to the company becoming insolvent. A well-structured standby letter of credit can also help in fixing some urgent liquidity requirements and funding of some long term loans. Occasionally every business enterprise or company experiences shortage of funds to finance their running costs. A standby letter of credit will be very much advantageous in such situations. A company may minimize its costs of operations in the end if it finances its projects using standby letters of credit. This is because the bank periodically does things that can enhance the company’s credit lines. Another advantage of using standby letters of credit is their competitiveness. Majority of standby letters of credit pricing is relatively lower than other forms of credit financing.