What is a Standby Letter of Credit

A Standby Letter of Credit (SBLC) is a banking instrument, and it is used mainly to underpin Trade Finance transactions, its expiry date varies from one trade to another, and is a payment of the last resort. Two companies will enter into a contract, the buyer, (the Provider), and the seller, (the Beneficiary), and whilst the buyer and the seller may not be known to each other, the Standby Letter of Credit (SBLC) will guarantee payment and guarantee delivery of goods, however, it does not guarantee the buyer will be satisfied with the goods.

Under instructions from the buyer, their bank, (The Issuing Bank) will transfer a Standby Letter of Credit (SBLC) in favour of the seller, direct to their bank, (The Receiving Bank). If the buyer does not honour their financial obligation(s) to the seller, under the terms of the Standby Letter of Credit, the seller will instruct their bank to claim the amount owed from the Issuing Bank.

It is therefore safe to say that a Standby Letter of Credit is a means of payment, however, as explained under “Monetising a Standby Letter of Credit”, when a Standby Letter of Credit is utilised for monetisation purposes, it becomes a guarantee of payment.