Generally standby letter of credits are classified in two categories i.e. performance standby LC and financial standby LC.
The standby letter of credit process can be very much similar to the process of obtaining a commercial loan, including some few key differences.
Initially you need to provide proof for your creditworthiness. As per the proofs and documents the bank decides that you could be provided with standby letter of credit or not. Well SBLC process is much easier and quicker as compared to other forms. SBLC is generally issued within a week as soon as the required paperwork has been carried out and the documents are submitted.
The bank requires particular standby of letter of credit fee which is specifically between 1-10% of the SBLC amount and is paid before issuing the letter. The fee for standby letter of credit is usually charged on per year basis when the letter of credit is in effect. If the terms described within the contract are fulfilled earlier than the mentioned date, you can easily cancel the SBLC without any additional charges.
Standby letters of credit helps in establishing trust within business partners and act as a powerful tool for accomplishing the business goals.
Financial standby LC: Supplier, exports goods to a foreign buyer, and the buyer is supposed to pay for the consignment within 60 days. In case the payment does not arrive then seller can ask the buyer to use a standby letter of credit so that the payment can be collected from the importer’s bank. Before issuing the standby letter of credit, the bank has to evaluate the buyer’s credit which helps to determine, if the importer will be able to repay the bank.
Performance standby LC: A contractor has been given with the terms of completing a construction project within the particular timeframe. Let's say the deadline arrived, and the project is not yet completed. In such situations using a standby letter of credit, the contractor’s client can demand for the payment from the contractor’s bank. This payment will function as a penalty for encouraging on-time completion of work. This is a simple example of a “performance” standby letter of credit, where it depicts a situation of failure to performance that triggers the payment.
|It is termed as ‘Letter of Credit’.||It is termed as ‘Stand By Letter of Credit’.|
|It can be defined as a type of guarantee that the exporter get, to receive payments in time by the buyer.||In case of a default, it is defined as an assurance that the supplier will receive correct payments by the bank.|
|It can be seen as a primary payment mechanism for a payment transaction.||It serves as a secondary payment mechanism for a payment transaction.|
|The expiration date of an LC is usually about one month to three months.||The expiration date of an SBLC is about one year and can be more.|
|It can be considered as an instrument of payment.||It is generally used as a backup method to pay the financial credentials of the benefactor.|
1. What is the difference between LC and standby LC?
Letter of credit is defined as a type of guarantee that the exporter get, to receive payments in time by the buyer. Whereas, Standby letter of credit is defined as an assurance that the supplier will receive correct payments by the bank.
2. What is LC and SBLC?
A standby letter of credit can be considered as a guarantee for payment by the bank on behalf of the importer (client). It is a type of loan within which the bank is responsible for fulfilling the payment obligations at the end of the contract in case if the client is not able to make the desired payments.
An LC is a financial document which is provided by a third party i.e. a bank or a financial institution that guarantees the payment for goods and services to the exporter once the exporter submits the required documents.
3. How much does a standby letter of credit cost?
Costs are customized for each product transaction and therefore an exact quote can only be provided once a completed application is received, but as per letter of credit pricing guide:
4. What is difference between LC and bank guarantee?
Letter of Credit can be seen as a commitment of importer’s bank to the exporter’s bank. As per LC bank is supposed to accept the invoices being presented by the seller and pay him for the consignment being sent subject to certain conditions. Whereas in Bank guarantee, a surety is given to the beneficiary by the bank on behalf of the applicant, to ensure payment, if in case the applicant defaults to make payment.
5. What is SBLC mt760?
A Standby Letter of Credit (SBLC) can be seen as a payment guarantee which is issued by a financial institution utilizing SWIFT MT760 message, and is specifically used as payment for a customer for the case in which the applicant defaults.