The standby letter of credit is a banking instrument used to guarantee different kinds of obligations. If the applicant does not fulfill the commitments acquired, the bank guarantees the payment.
The Stand By Letter of Credit does not constitute a means of the payment itself but instead 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 tremendous operational difference between standby credits and commercial letters of credit is that the last ones must present the documentation to the bank as a necessary condition to collect the export. In the Standby Letters of Credit, you have to offer 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 regular letters of credit since the exporter must only present the documentation required in the letters of credit in case of default by the buyer.
About ordinary guarantees, there is an absolute decoupling between them and the commercial operation they protect. Thus, while a commercial dispute regarding the fulfillment 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. 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.
It is recommended that irrevocable, confirmed, available at the first requirement be issued and a contract between buyer and seller.
They are issued with a specific expiration; that period must be considered by the payer as the deadline to fulfill their commitments (payment, contract fulfillment, 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 standby is authorized to execute/collect it, usually, against the presentation of a letter or certification of non-compliance that he 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.