What is a Standby Letter of Credit?
Standby LCs are used as a form of guarantee to cover default by a Buyer; The Buyer pays directly for goods ordered and, only in the event of non-payment by the Buyer, does the Seller claim under the Standby LC. Standby LCs are used to support regular supply contracts with Exporters. The Importer arranges for their bank to provide the Exporter with a Guarantee that, in the event that goods have been shipped and the Exporter has not been paid, the Importer's bank will guarantee payment for a pre-determined amount.
The LC is issued subject to usual International Chamber of Commerce rules and is usually payable against a written declaration of non-payment supported by a copy of the unpaid invoice and relevant shipping documentation; Standby LCs are subject to credit approval.
- Importer can secure a regular supply of goods.
- Enables the Importer to establish a pre-determined credit line with the Exporter.
- Utilisation of the Importer's credit facility with their bank is limited to the maximum amount due to the Exporter.
- Enables the Importer to negotiate better price or credit terms with the Exporter.
Restrictions / Disadvantages
- It is necessary for the Importer to have a line of credit with a bank before the bank can issue an LC. The amount outstanding under each LC issued is applied against this line of credit from the date of issuance until final payment.
- The Importer cannot cancel or amend a Standby LC without the agreement of all parties involved.
- The decision to pay is in the hands of the issuing bank, not the buyer.
- Standby LCs do not guarantee the quality or quantity of the goods.
For further information please contact your Relationship Manager or our Trade Finance team.