What You Should Know About Standby Letters Of Credit

By: Wade Henderson

A standby letter of credit is a combination of financial guarantee and documentary credit. It works as a guarantee when the seller of the merchandise does not work according to the written agreement. It also works as a credit document because it needs all documentation to be submitted.
However, despite the connections that can be done with the documentary credit, it should not be confused with the latter because it does not fulfill the same functions. Indeed, a standby letter of credit it is a technique to protect against the risk of non-payment, but it does not constitute a payment arrangement.
A standby letter of credit brings many benefits to the seller or exporters. These kinds of document will work only under the most negative scenario. Let us say that the seller did not pay the exporter as it was agreed beforehand. A standby letter of credit will be produced by the seller and used to request payment for the products sold. When this happens, the seller needs to show documents to prove non-payment. Generally, a statement or declaration of non-payment will be enough to start the process.
In order to protect themselves from failure to compliance, exporters and importers sign contracts where they both agree to their responsibilities. A standby letter of credit may be signed in order to use it when something goes wrong with the transaction. There is always the participation of a bank in the country of the seller and one in the country of the buyer. When the documents are in order, the merchandise is shipped. When received at port of entry, the seller is normally paid.
However when things do not go according to plan, a standby letter of credit is used. Let us say that the seller was not paid for its products for an unknown reason. He or she will then requests a certified document that proves that the buyer has not paid and presents it with any other necessary documents. The seller will show documents that prove that his or her responsibilities were fulfilled and later the issuing bank will give the payment.
The evidence to the involvement of a commercial standby letter of credit are rather complex and few. It may be asked to produce:
One: the certified documentation that proves the non-payment and which the seller will sign on top.
A copy of the commercial invoice;
Three: a copy of the document that proves that the shipment was performed.

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Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com Letter Draft LC Advance

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