answersLogoWhite

0


Best Answer

A letter of credit is used as a method to facilitate payment of international trade transactions (ie: the import/export of goods/services).

Unlike a trade letter of credit, a standby letter of credit is NOT meant to be used for payment. A standby letter of credit is used as a form of "back-up" guarantee (hence the name "standby") used for a variety of purposes.

There are two types of standby letters of credit: Performance Standby L.C. and Financial Standby L.C.

Performance Standby's are used to guarantee some sort of performance of a contractual obligation. For example, a construction company building a highway bridge might be required by the highway department to put up a performance standby letter of credit ensuring that they will complete the project contracted or to warranty the work. Under normal circumstances the standby would not be drawn upon, however if the contractor abandoned the project midway through completion or if the bridge were unsafe, the standby letter of credit could be drawn upon for its specified dollar amount.

A Financial Standby Letter of Credit is similar in concept to the Performance Standby, but instead acts as a guarantee for payment of financial obligations.
For example, companies trading on securities markets are frequently required to have financial standbys in place benefiting the particular Stock Market exchange which can be drawn upon if they are for whatever reason unable to settle their trades at the end of the day.

Financial standby's can also be used in international trade, but in a different manner than standard letters of credit.
Normal trade letters of credit are intended to be used for pre-specified shipment(s) of goods or services. The letter of credit requires documents specifically evidencing the trade transaction itself and the letter of credit serves as the vehicle for payment of the trade transaction.
When financial standby's are used for trade purposes, they are not intended as a means of payment, but as with all standby's, act as a "back-up" guarantee.
Financial standbys frequently are used between buyers and sellers who have frequent, ongoing trade shipments for an extended period of time. The standby acts as a blanket guarantee for the overall obligations of the buyer to pay and does not contains specifics related to any one particular shipment.

User Avatar

Wiki User

โˆ™ 2009-10-25 01:41:49
This answer is:
๐Ÿ™
0
๐Ÿคจ
0
๐Ÿ˜ฎ
0
User Avatar
Study guides

Personal Finance

20 cards

What is rhetorical device

Who was the father of rationalism

What is a cash advance

What is discretionary spending within a budget

โžก๏ธ
See all cards

Economics

20 cards

What type of policy is a certainty that the insurance company will have to make payment

What is the purpose of the loans made by the World Bank

What is the main intention of boycotts

How does the WTO promote global free trade

โžก๏ธ
See all cards

Economics

21 cards

What does liability insurance cover

How has globalization contributed to the recent increase in international terrorism

Why is globalization potentially damaging to the environment

Why does the growth of international trade lead to a rising global standard of living

โžก๏ธ
See all cards

Add your answer:

Earn +20 pts
Q: What is the different between letter of credit and standby letter of credit?
Write your answer...
Submit
Related questions

Standby letter of credit?

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 assurance of his ability to perform under the terms of a contract between the beneficiary


What is the difference between a Bank guarantee and standby letter of credit?

nothing


What is MT766?

MT766 IS A SWIFT COMUNICATION BETWEEN TWO BANKS FOR STANDBY LETTER OF CREDIT ADVICE.


Is Standby Letter of Credit always cash backed?

no, we can issue standby letter of credit to clients with such credit facilities. although it may be backed with trust receipt depending on the credit standing of the client. cbctsdp trainee


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 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.


Where can one find information about a standby letter of credit?

There are a few sites that offer information about a standby letter of credit. The best information was found on the Investopedia website and the Golden Eagle Investments website.


What is an MT766?

MT766 IS A SWIFT COMUNICATION BETWEEN TWO BANKS FOR STANDBY LETTER OF CREDIT ADVICE.... This letter is being used for Credit advice and within Banks i.e. 2 or more Banks can be there in communication.


What is SWIFT MT700?

A MT700 is the SWIFT format for a Documentary Letter of Credit, but it is also possible to issue a Standby Letter of Credit using the same SWIFT message type.


What is difference between LC and SBLC?

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 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 its 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. MT799confirmation.com is in the leased funds business, we have been doing this for over 5 years and deal with the top banks(AAA rated), HSBC, DEUTSCHE Bank, Barclay's,Bank of America, mostly any bank in the world in every continent. We understand each transaction and work to create a win-win result for our clients. We manage over $5B in funds, and can fulfill most funding requests, in 2-14 days. We can issue fresh cut and seasoned bank guarantees, sblcs, cash accounts via MT202, MT799, MT760, for trade.


Who is SBLC?

SBLC (Standby Letter of Credit) A Commercial Letter of Credit is taken as Guarantee to be used in payment of goods and services. The Standby Letter of Credit issued is taken as guarantee that the applicant, the customer of issuing bank will execute responsibilities under an agreement. In other words, if an applicant fails to meet the promises made, the beneficiary draws on standby. According to the Controller of Currency, Standbys defined as, 'any letter of credit or a similar document issued which mentions responsibilities to the beneficiary on the side of issuer. The SBLC (Standby Letter of Credit) mentions details regarding- 1. To pay back the money borrowed or advanced to or for the account of the account party. 2. To pay on account of an indebtedness undertaken by the account party 3. To pay in case of default by the account party in meeting of any promises made.


Difference between banker's acceptance and letter of credit?

differecences between banker's acceptance and letter of credit


How is opening letter of credit different from establishing letter of credit?

Both has same meaning, opening letter of credit establishing letter of credit once letter of credit is opened, credit is established.


What is the practical difference if any between an irrevocable letter of credit and an irrevocable standby letter of credit?

A standby letter of credit ("Standby") is an irrevocable, binding undertaking by an Issuer (generally, a bank), made at the request of an Applicant (generally, a bank's customer), for the benefit of a Beneficiary, to ensure payment or performance of an underlying obligation. Its commercial value lies in its being totally independent of any agreement between the Beneficiary and the Applicant or the Applicant and the Issuer. Once issued, the issuer must honor the terms of the standby if the beneficiary presents documents, such as a draft (bill of exchange) or written demand for payment, that strictly comply with the terms of the standby letter of credit. Standbys are most frequently issued in the United States and until relatively recently, were less commonly used in the UK and Europe, where bank guarantees were more likely to be used to achieve similar purposes. In fact, because certain American banks were prohibited from issuing guarantees, standby letters of credit were developed as a substitute and became the primary means by which American banks ensured payment or performance. Typically, a standby is used to ensure payment of an obligation (such as a contract or lease calling for payment at a future time) or performance of an obligation (such as completion of a construction project). In the case of the performance standby, the beneficiary would seek to provide sufficient funds to enable another contractor to complete the project. Demand guarantees issued by banks or performance bonds issued by insurance companies would provide similar assurances. As standbys are often used internationally, a body of international custom and practice has developed to promote uniformity in handling standbys. It is embodied in the Uniform Customs and Practice for Documentary Credits (International Chamber of Commerce Publication 500) ("UCP"), which covers commercial letters of credit as well as standbys, and the International Standby Practices ("ISP"), which covers only standbys and was developed by the International Financial Services Association. Although proceeds of a standby may be assigned, the standby itself is usually not transferable unless the standby so provides. If the standby provides that it is transferable, the UCP and ISP differ on the consequences. Under UCP Art. 48(b), it may be transferred only once. Under ISP Rule 6.02, however, it may be transferred more than once, but the issuer must agree to the transfer requested by the beneficiary. In either case, the restrictions would effectively destroy the ability to trade the instrument quickly. === ===


What is the difference between a letter of credit and a supercedeas bond?

is a letter of credit considered the same as a supercedeas bond?


Buyers credit - Letter of credit?

A red clause letter of credit is similar to a letter of Credit which is written to state or confirm the availability of funds for a particular transaction between the seller and buyer. However, a clause is included in the letter stating that the stated amount or credit can be advanced immediately on showing the letter.


Can a letter of credit be a By line of credit?

no because the two is far different from each other.


What are some types of letter of credit?

Documentary letter of credit, open letter of credit, confirmed letter of credit,unconfirmed letter of credit, revolving letter of credit, fixed letter of credit,transferable letter of credit,nontransferable letter of credit,revocable letter of credit,irrevocable letter of credit,back to back letter of credit.


Difference between buyers credit and letter of credit?

Buyer's credit is extended to finance the purchase of goods or services. A letter of credit guarantees that a payment will be received. If the buyer doesn't make a payment, the bank has to pay.


Out of different types of letters of credit what is revolving letter of credit?

A Revolving letter of Credit is issued by a financial agency to its clients and potential customers of the availability of credit facility offered. The letter contains the credit terms and conditions that are attractive to the clients and potential customers. It is one of the ways which a financial agency can generate income.


What is the difference between letter of credit letter of guarantee?

Both Letter of Credit and Letter of Guarantee are commitment to payment by the issuer of the instrument (generally a Bank). In letter of credit, the issuer has to fulfill his commitment on fulfilling the terms and conditions of the letter of credit by the beneficiary. Whereas, on the other hand, in letter of guarantee the issuer has to make payment, when the beneficiary is unable to fulfill the terms & conditions of the letter of guarantee.


What is sblc and what are the risks?

The standby letter of credit is termed by United States banking legislation which forbids US banks and credit institutions to issue guarantees. The standby letter of credit issued by US banks and credit institutions is based on Uniform Customs and Practice for Documentary Credits (UCP 600). The bank issuing the Standby letter of credit ensures the credit check of the party seeking the letter of credit by performing underwriting duties. Then it sends notification to the bank of the party seeking the letter of credit. Standby letter of credit (SBLC) can be used for following purposes: 1) It ensures guarantee of payment after a contract or bid has been awarded. 2) It acts as advance funds to the seller by the buyer for purchase of materials for certain project. 3) It backs up the seller obligations if he doesn't perform in accordance with the terms of contract. 4) It backs up obligations of underwriting. 5) It assures that project will run smoothly after completion until warranty period. 6) It acts as collateral for loan. It also helps in getting lower interest rate on the loan. 7) It helps in getting tax-exempt financing for investing in equipment that protect the environment. 8) When securing assets, it reduces the portfolio risk. 9) It improves the credit ratings of bonds, notes, securities or any kind of commercial paper supported by letter of credit. 10) It enables commercial paper program to obtain higher quality rating which provides low cost & short term financing along with liquidity facility. fastletterofcredit.com is in the leased funds business, we have been doing this for over 5 years and deal with the top banks, HSBC, Dutch Bank, Barclay's, Bank of America, mostly any bank in the world in every continent. We understand each transaction and work to create a win-win result for our clients. We manage over $5B in funds, and can fulfill most funding requests, in 2-14 days. We can issue MT202, MT799, MT760, bank gaurantees, sblcs, cash accounts for trade or credit enhancement purposes


Different between formal and informal letter?

informal letter informal letter


Difference between business and friendly letter?

the different between friendly and business letter


What is irrevocable revolving nontransferable documentary letter of credit?

it's a business transaction done between 02 parties and a bank holding credit


What is a commodities letter of credit?

It is a Letter of Credit covering commodities.