The standby letter of credit is a banking instrument that is
used to guarantee different kinds of obligations, in which if the applicant
does not fulfil the commitments acquired, the bank guarantees the payment.
The Stand By Letter of Credit does not constitute a means of the payment itself but rather functions as a guarantee against the possible
default of an importer. It is, therefore, a guarantee presented by the
importer's bank that protects the exporter from the possible non-payment of the
merchandise being sold.
In international trade operations, the use of the 'Stand-by'
Letter of Credit or an Independent Guarantee has been generalized as an instrument to ensure compliance with obligations.
Through Standby Letters of Credit, obligations such as:
·
Obligations of
Commercial type.
·
Obligations of financial
type.
·
Obligations of Services.
The differences between
the standby letter of credit versus commercial letters of credit
The great operational difference between stand-by credits and
commercial letters of credit that in the last ones must present the
documentation to the bank as a necessary condition to collect the export and in
the Stand-By Letters of Credit you just have to present the documentation to
the bank to charge if the importer has stopped paying within the expected
period.
The standby letter of credit is less complex operationally for
the exporter than normal letters of credit, since the exporter must only
present the documentation required in the letters of credit in case of default
by the buyer.
In relation to ordinary
guarantees, there is an absolute decoupling between them and the commercial the operation they protect. Thus, while a commercial dispute regarding the
fulfilment or non-compliance of any of the parties may contaminate the
guarantee represented by ordinary guarantees, the standby letter of credit is
not affected in any way, and in the event of default, the exporter presents the
documents stipulated to the bank and the bank (if the documents are formally
compliant) must pay.
The standby letter of
credit is issued under the international CCI regulation, while ordinary
guarantees are subject to the legislation of the countries of the banks that
guarantee the operations.
Recommendations
It is recommended that
irrevocable, confirmed, available at the first requirement be issued and that
there is a contract between buyer and seller
They are issued with a
certain expiration, that period must be considered by the payer as the deadline
to fulfil their commitments (payment, contract fulfilment, etc.) before the
beneficiary and for the beneficiary, it will mean the deadline to collect the
stand by.
They are issued for an amount that covers and fully covers the total value of the transaction.
In the event of
non-compliance, the beneficiary of the stand by is authorized to execute /
collect it, normally, against the presentation of a letter or certification of
non-compliance that he himself issues and attaching the respective support
(copies of unpaid invoices, guarantee slips, etc.) if appropriate. The
banks involved will not question the beneficiary's declaration of default
against the payer.
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