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.