The recipient of a standby letter of credit is assured that he or she is doing business with a person or company that can pay the bill or terminate the project. There are two main types of standby letters of credit: an SLOC is most often sought by a company to help it obtain a contract. The contract is a “watch” agreement, because the bank only has to pay in the worst case scenario. Although an SBLC guarantees payment to a seller, the agreement must be strictly respected. For example, a delay in shipping or a miss spelling of a company`s name may lead the bank to refuse payment. In the worst case scenario, the bank that issues SLOC fulfills its client`s obligations when a business goes bankrupt or ceases operations. The customer pays a fee for each year the letter is valid. As a general rule, the fee is 1% to 10% of the total commitment per year. For the company that is presented with an SLOC, the greatest advantage is the potential ease of getting out of this most pessimistic scenario. If a contract requires payment within 30 days of delivery and payment is not made, the seller can submit the SLOC to the buyer`s bank for payment. Thus, the seller`s payment is guaranteed. Another advantage for the seller is that the SBLC reduces the risk that the buyer will change or cancel the production order. The procedure for obtaining an SLOC is similar to a loan application.
The bank only issues them after assessing the applicant`s creditworthiness. A standby letter of credit (SLOC) is a legal document that guarantees a bank`s obligation to pay a seller if the buyer – or the bank`s customer – is not late in the agreement. A standby letter of credit facilitates international trade between companies that do not know each other and have different laws and regulations. Although the buyer is sure to receive the goods and the seller is sure to get the payment, an SLOC does not guarantee that the buyer is satisfied with the goods. A standby letter of credit can also be shortened SBLC. In addition, small businesses may have difficulty competing with larger and better-known rivals. A SBLC can make its offer for a project more credible and often help avoid an advance payment to the seller. A SBLC helps ensure that the buyer receives the good or service described in the document. If, for example.B. a contract requires the construction of a building and the owner does not provide, the client submits to the bank the SLOC which must be done as a whole.
Another advantage, if involved in global trade, a buyer has a greater guarantee that the merchandise is delivered by the seller. SLOC is often seen in international commercial contracts, which usually involve a significant commitment of money and have additional risks.