Stand By Letters of Credit in International Trade

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.