International Business and Trade

What does SBLC mean in terms of international trading?

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2015-04-10 02:33:43

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

date.

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.


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