What does SBLC mean in terms of international trading?
SBLC stands for 'stand by letter of credit'. The standby letter
of credit serves a different function than the commercial letter of
credit. The commercial letter of credit is the primary payment
mechanism for a transaction. The standby letter of credit serves as
a secondary payment mechanism. A bank will issue a standby letter
of credit on behalf of a customer to provide assurances of his
ability to perform under the terms of a contract between him and
the beneficiary. The parties involved with the transaction do not
expect that the letter of credit will ever be drawn upon.
The standby letter of credit assures the beneficiary of the
performance of the customer's obligation. The beneficiary is able
to draw under the credit by presenting a draft, copies of invoices,
with evidence that the customer has not performed his obligation.
The bank is obligated to make payment if the documents presented
comply with the terms of the letter of credit.
Standby letters of credit are issued by banks to stand behind
monetary obligations, to insure the refund of advance payment, to
support performance and bid obligations, and to insure the
completion of a sales contract. The credit has an expiration
The standby letter of credit is often used to guarantee
performance or to strengthen the credit worthiness of a customer.
In the above example, the letter of credit is issued by the bank
and held by the supplier. The customer is provided open account
terms. If payments are made in accordance with the suppliers'
terms, the letter of credit would not be drawn on. The seller
pursues the customer for payment directly. If the customer is
unable to pay, the seller presents a draft and copies of invoices
to the bank for payment.
The domestic standby letter of credit is governed by the Uniform
Commercial Code. Under these provisions, the bank is given until
the close of the third banking day after receipt of the documents
to honor the draft.