D-1-6- Standby letter of credit

Payment processing is one of the main preoccupations of companies with international transactions. Doing business is important, but compensation is essential. Esandis offers you free training space dedicated to international transactions, and all the skills you need to become an export or import manager. Our objective is to provide you an understanding of the importance of the payment component of an international transaction.

1-6-1- Standby letter of credit: definition

A payment solution: the standby letter of credit is a proven solution that is seldom used, but more prevalent than the documentary credit.

It is of interest for business flows with little risk. In contrast to the documentary credit, the standby letter of credit is more like a bank guarantee. It is used to guarantee smooth transactions in case of default on the part of the importer.

1-6-2- The standby letter of credit: Exchange of documents against a guarantee

Like the documentary credit, the standby letter of credit is an exchange of documents against the benefit of a guarantee. Indeed, the exporter must send its documents to the importer, who will be then able to recover its goods. The exporter will receive payment at the due date

1-6-3- The standby letter of credit: variations

The standby letter of credit has its own variations. Listed below you will find all standby letters of credit:
  • The standby letter of credit by direct payment,
  • The standby letter of credit by performance,
  • Financial standby letter of credit,
  • Reimbursement standby letter of credit,
  • Repayment standby letter of credit,
  • Insurance standby letter of credit,
  • Guarantee standby letter of credit.

1-6-4- Stand by letter of credit: specifics

Standby letters of credit are also:
  • Irrevocable, confirmed (possibly by the exporter's bank, see: Irrevocable and confirmed credit),
  • executable at first request, against furnished copies of documents (commercial invoice, transport documents, etc.) within the application and with a certificate verifying that the exporter has fulfilled its commitments,
  • subject to a validity date ,
  • and issued for a fixed amount stipulated on the request.

1-6-5- Advantages of the standby letter of credit versus the documentary credit

  • Easier to use than the documentary credit.
  • More flexible.
  • Avoids the payment of document fees, in contrast with the documentary credit.
  • More simple documents
  • The standby letter of credit validity shall be subject to the date stipulated in the letter of credit and not to a fixed validity, as is the case for a documentary credit.

1-6-6- Disadvantages of the standby letter of credit

  • Low protection in the event of default.
  • Time constraints.
  • Utilized for a shorter duration.
  • Less frequently used as the documentary credit, thus it can be prone to errors.

1-6-7- The standby letter of credit: conduct in case of default of payment

If there is a default to meet obligations on the part importer, the exporter can utilize the guarantee. The exporter must furnish documents to the bank and prove non-payment despite execution of the sales contract.

1-6-8- The standby letter of credit: legislation

As it is the case for all payment techniques, the standby letter of credit has its own rules. It is subject to laws, rules and to Uniform Customs and practice UCP600 for documentary credit, ISP 98 (International Standby Practice) published by the ICC, International Chamber of commerce, in 1998.

the international chamber of commerce set up a standard standby letter of credit