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.
Nevertheless, it is important to understand that a standby letter of credit is not a form of documentary credit per se. When it is true that a standby letter of credit bears a lot of similarity with the letter of credit is only protects against risk of non-payment but it is not a payment agreement.
The standby letter of credit type of commercial guarantees the obligations of a buyer to pay for goods or services. It is the irrevocable commitment of a bank to compensate the beneficiary when the payer defaults. Standby letter of credit can be used against the handing over of some documents that may be limited to the statement made by the creditor that the debtor has not fulfilled its obligations.
The two parts, the exporter and importer sign an agreement which is a standby letter of credit that guarantees the payment for the exporter. Two banks, the issuing bank and one in the country of the importer coordinate in order for the credit document to be valid. Once this documentation is ready, the merchandise is shipped. Normally, transactions of this nature happen without problem and payment is sent to the exporter.
If the payment does not happen then the standby letter of credit comes to play. The unpaid seller appeals to the guarantee under the form of a request signed by him or her and certifying that the buyer has not fulfilled its payment obligations. Later the buyer will provide the documents that demonstrate that he or she has when the standby letter of credit is issued. If proven that the buyer has fulfilled its obligations, this results in payment by the issuing bank.
The evidence to the involvement of a commercial standby letter of credit are rather complex and few. It may be asked to produce:
The original of the certificate of non-payment, written on letterhead of the seller and signed by him;
The second one is the invoice showing the details and amounts of the transaction.
The last one is a proof of shipment of the merchandise.
Nevertheless, it is important to understand that a standby letter of credit is not a form of documentary credit per se. When it is true that a standby letter of credit bears a lot of similarity with the letter of credit is only protects against risk of non-payment but it is not a payment agreement.
The standby letter of credit type of commercial guarantees the obligations of a buyer to pay for goods or services. It is the irrevocable commitment of a bank to compensate the beneficiary when the payer defaults. Standby letter of credit can be used against the handing over of some documents that may be limited to the statement made by the creditor that the debtor has not fulfilled its obligations.
The two parts, the exporter and importer sign an agreement which is a standby letter of credit that guarantees the payment for the exporter. Two banks, the issuing bank and one in the country of the importer coordinate in order for the credit document to be valid. Once this documentation is ready, the merchandise is shipped. Normally, transactions of this nature happen without problem and payment is sent to the exporter.
If the payment does not happen then the standby letter of credit comes to play. The unpaid seller appeals to the guarantee under the form of a request signed by him or her and certifying that the buyer has not fulfilled its payment obligations. Later the buyer will provide the documents that demonstrate that he or she has when the standby letter of credit is issued. If proven that the buyer has fulfilled its obligations, this results in payment by the issuing bank.
The evidence to the involvement of a commercial standby letter of credit are rather complex and few. It may be asked to produce:
The original of the certificate of non-payment, written on letterhead of the seller and signed by him;
The second one is the invoice showing the details and amounts of the transaction.
The last one is a proof of shipment of the merchandise.
About the Author:
Wade Henderson - recognized Professional - 15 yrs in the Business Finance Field - strong reputation for getting the deal done. IMMFinancial.com
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