A Standby Letter of Credit (SBLC) differs from the Documentary Letter of Credit (LC) in that it is not a payment mechanism like the Documentary Letter of Credit (LC). Instead the Standby Letter of Credit is only used when a party defaults in their payment or performance obligations under the terms of a trade contract. Compared to Documentary Letters of Credit, Standby Letters of Credit are simple, flexible and affordable. The following information demonstrates some typical applications or risk strategies and some of the advantages of using a Standby Letter of Credit (SBLC) in Importing & Exporting:

Importer Provides a SBLC to an Exporter

• When an Import business would like to establish an “open account” relationship with a new Export business where the SBLC would cover the risk of non-payment from the Importer according to the terms of the ‘open account.’ In this case, the SBLC would eliminate the suppliers risk so that he would be more likely work with the Importer under terms he favors.

• When an Importer covers his non-payment with an SBLC for the benefit of the Exporter.

Exporter Provides a SBLC to an Importer

• When the Exporter covers an advance payment with a SBLC that he wants from the Importer.

• When the Exporter would cover an Importer’s concern regarding quality/specification compliance, shipping schedule compliance of the product, or other specified services or obligations included in a trade contract.

Advantages of an SBLC for the Importer:

• Allows the Importer to establish a credit history with the Exporter.

• Saves considerable money and time with repeat business because the Importer only needs to cover the maximum exposure risk of the Exporter at any one time with one SBLC covering an entire year. For example, let’s say, the Importer in one year has a total of 10 orders from the Exporter and the Exporter never has more than three unpaid orders: one that he is currently manufacturing, one currently being shipped to the Importer, and one that the Importer has received but not yet paid for. In this case, the Importer would only cover 3 orders with one SBLC instead of incurring the very high cost of needing 10 Letters of Credit to cover each single order.

• Overall affordable, easy to administrate and process

• Flexible because the SBLC can be renewed

• SBLC ensures the delivery of goods or that the service or supplier performance will be provided in accordance with the terms of the trade contract.

• Ease of payment, the Bank only needs to establish default of payment or performance from a few documents to establish this fact so that the Exporter can be paid

Advantages of an SBLC for the Exporter:

• Simplest and most reliable technique for the Exporter.

• Time is gained in export trade because documents are only checked in exceptional cases when the buyer has defaulted (failed to pay)

• Also, payment from the Importer is faster because once documents have reached the airport or port, by International Law only 3 to 7 days are given to review the documents and finalize the acceptance of the goods.

• Affordable, easy to administrate and process.

• Eliminates the problem of discrepancies, which occur 50% of the time using Documentary Letters of Credit (LC) as a payment mechanism, which can cause the payment to be delayed.

• Ease of Payment, the Bank only needs to establish default of payment or performance from a few documents to establish this fact so that the Exporter can be paid.

In summary, a SBLC can eliminate many of the suppliers risks and buyers risks. Careful consideration of all factors is a necessary part of Import and Export trade finance.