Standby Letter of Credit

Types of Standby Letters of Credit

• A financial standby letter of credit:

Based on the financial standby letter of credit, offer guarantees of the payment for services and goods, as set out in the agreement. For instance, if a company of crude oil gives oil to a foreign buyer with the expectation that the buyer would pay within 30 days from the shipment date, but the payment is not made by the selected date, the seller of crude oil can collect the payment from the buyer’s bank for delivered goods. Since it is a credit, the bank would collect the principal plus interest from the buyer.

• A performance standby letter of credit: 

Based on a performance standby letter of credit offer guarantees the completion of a project within stipulated timelines. If the bank customer cannot complete the project mentioned in the contract, then the bank promises to pay a specific amount on the contract to the third party.

A demonstration standby letter of credit is used in a project scheduled to be completed within a specific timeline, like construction projects. In the case of delaying the completion of the project, then the payment serves as a penalty and is used to compensate for the inconvenience caused to the client or to pay another contractor to handle the project.

Process for obtaining a standby letter of credit

• The consumer and seller allow running the business. The seller requires a letter of credit to guarantee payment.
• The buyer practices to his bank for a letter of credit in support of the seller.
• The Bank of the buyer approves the buyer’s credit risk, and results and forwards the credit to its related bank. The related bank is usually situated in the equivalent geographic area of the seller.
• The advising bank will certify the credit and deliver the original credit to the seller.
• The Seller transports the assets, then check and produces the documentary to carry the letter of credit. Documentary needs can vary hugely as per the risk included in dealing with an appropriate company.
• The seller offers the necessary documents to advise or verifying the bank has been prepared for payment.
• Advising or confirming bank checks the documents for agreement with the term and requirements of the letter of credit.
• If the documents are right, the money will be claimed on advice or confirmation by the bank.
• Debiting the account of the issuing bank.
• After getting the documents, waits till the issuing bank remits.
• Reimbursement on another bank as needed in the credit.
• Advising or confirming the bank will deliver the documents to the issuing bank.
• Now issuing bank will check the documents for the agreement. If they are in sequence, the issuing bank will debit the buyer’s account.
• The issuing bank then releases the documents to the buyer.