Standby Letters

What is a Standby Letter of Credit?
Similar in many ways to a Commercial Letter of Credit, a Standby Letter of Credit represents a guarantee by the issuing bank to pay a specific sum of money to a named beneficiary. This payment is contingent upon specific terms and conditions of the credit specified in advance.

The difference between the two instruments is that while a Commercial Letter of Credit is issued as a primary source of payment, the Standby Letter of Credit is typically issued as a backup source of payment or guarantee. The Standby Letter of Credit is usually intended to be drawn on only in the event of a default under the original payment agreement.

Uses of Standby Letters of Credit
Standby Letters of Credit are used in both domestic and international transactions. Common uses of the Standby Letter of Credit include:

• Securing open account payment terms
• In lieu of bid, performance and warranty bonds under contracts
• Advance payment guarantee
• To secure payment of a loan or other financial obligation

Standby Letters of Credit are most often used for transactions in high-risk countries; for repeat sales; or in cases where the applicant is a good, fair or unknown credit risk.

Obtaining Payment Under a Standby Letter of Credit
To obtain payment under a Standby Letter of Credit, the beneficiary must present proof that the applicant has failed to make payment or perform a required action. This proof usually includes a sight draft and a statement from the beneficiary.

Wording of a Standby Letter of Credit is crucial to achieving its desired goal. The beneficiary of the Standby Letter of Credit will usually prefer less restrictive language, enabling an easy draw of payment. The applicant may want to require more specific language, listing in detail the conditions under which a draw will be permitted.

If you have any questions, please feel free to contact the International Banking Department at 1-800-230-5506 (Mon-Fri 8:30am - 5:00pm CST).

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