Updated: Jul 2, 2020
You might think that a Standby Letter of Credit (SBLC) is just another form of commercial LC with standard additional features.
Contrary to that, SBLC is entirely different from the commercial LC. SBLC is technically similar to Bank Guarantee or Demand Guarantee, which is mainly serves as a guarantee to be executed only when the primary means of settlement is not honored. The term SBLC is commonly used in countries whereby the law disallow banks to give any sort of guarantee and thus prohibited from using the term guarantee.
The difference between commercial Letter of Credit (LC) and SBLC
Contrary to the name suggested, SBLC are entirely different from commercial LC in terms of how they are structured, how they are executed, and the rules governing their compliance.
Contrary to a commercial LC, the execution of the terms in SBLC is only carried out when the primary mode of payment is not carried out. As opposed to commercial LCs whereby its compliance are commonly governed under the rule of UCP600, the compliance of SBLC is more commonly governed under ISP98.
How is this beneficial for the traders?
An SBLC reduces the risk of both the buyers and the sellers of a trade.
SBLCs are meant to guarantee the performance of a trade when the initially agreed method was not carried out. For example, a Performance SBLC will support the obligation of the seller to supply the agreed goods. Another example is when a Financial SBLC supports the obligation of of the buyer to make payment to the seller if the conditions stated in the SBLC is fulfilled.
Additionally, SBLCs give some flexibility for mode of payment and how the operation of the trade will be carried out. The buyers and the sellers can still agree on the their usual method of transactions while having the security of undertaking from a bank.
We hope this article helps with some of your questions around LC. If you wish to find out more, do check out our blog https://www.lcassistsg.com/blog-1