Letter of credit is a legal document issued by the importer's bank in the favor of the importer's guaranteeing beneficiary that the payment will be made or terms & conditions of the contract will be fulfilled by the importer. But in the event, if the importer is unable to do this, the whole or remaining payment will be done by the issuing bank. But a Standby Letter of credit is slightly different.
What Is A Standby LC?
Putting it in simple words, a Standby Letter is also a legal document issued by the buyer's bank guaranteeing payment to the seller but it only activates if one of the parties to the contract defaults on the agreement. For example, if the purchaser does not fulfill the terms & conditions of the contract or does not pay, the beneficiary can activate the standby LC and get compensation from the bank.
Example of Standby LC
As the name suggests, in a Standby LC, the bank is on “Standby mode” in regards to an agreement where it will only have to pay where there is any default. For example, an importer executes a transaction with a foreign vendor to ship 1000 widgets on open credit. To protect payment risk, the vendor requests the importer to deliver a letter of credit as part of their agreement. The importer applies to his bank for a standby LC and due to his sound credibility, the bank issues the letter and forwards it to the sender. Now, if the importer fails to meet terms & conditions, the vendor can submit the proof documents to the importer’s bank and get the payment from the bank. Axios Credit Bank is a popular financial platform offering international trade finance, letter of credit/standby LC, and other offshore banking for corporate imports & exports.
What Is Financial LC?
You can understand the Financial LC as an irrevocable undertaking by the bank guaranteeing the beneficiary that the payment will be done on time for his delivered goods & services by the importer. But if the importer fails to do so, it will be paid by the bank to the beneficiary. The bank makes the payment in full as a financial LC has a 100% conversion factor. Before issuing, the importer’s creditworthiness is evaluated by the bank and for the customers with no so sound credit record, banks can demand collateral or funds on deposit.
What Is Performance LC?
Performance standby LCs are also an irrevocable undertaking by the issuing bank but it is given in regards to paying the beneficiary in case there is a default made by the importer in performing terms & conditions of the contract. In simple words, a performance LC assures the beneficiary that the importer will meet the contractual obligations of the contract but in case if he makes a failure, then the bank will pay 50% to the beneficiary.
Bottom Line
A standby LC is a growing need for businesses dealing in international trade & transactions. It helps the exporters to get assured of receiving payment on-time for their goods & services from the importers. But if for any reason, the payment is not made, they are assured of receiving their payment from the issuing bank. In short, it provides confidence to both the parties dealing in international trade. If you are an international businessman, you can contact Axios Credit Bank to avail of a variety of global trade finance services at affordable rates.
