How Standby Letter Of Credit Is Different From A Normal Letter

1. Standby Letter of Credit

2. How Standby Letter Of Credit Is Different From A Normal Letter • Standby letter of credit is a very reliable means of payment for activities related to foreign trade, and is used to guarantee different kinds of obligations, in which if the applicant does not comply with the commitments made, the bank guarantees payment. • nternational Trade is an activity in which the way of payment and collection of international sales, exports and imports are of vital importance, with the addition that given the complexity of the operations carried out, choosing the most efficient form of payment, that is, the one that allows obtaining the maximum security of collection at the lowest possible costs, depending on the type of operation or parties involved, is essential for obtaining competitive prices that allow entry into foreign markets.

3. The SBLC is a document issued by a bank (issuer) by order and express request of a client (orderer/importer), by which it authorizes the beneficiary (exporter) to issue a bill of exchange against the said bank or against another entity designated in the letter itself, committing to pay it, provided it is issued in accordance with the conditions of the letter of credit and accompanied by the required documents. • The standby letter of credit (or contingent credit) does not constitute a means of payment per se but functions more as a guarantee against the possible non-payment of an importer.

4. The International Chamber of Commerce (ICC) regulates the SBLC in two of its publications: UCP 600 in general and, more specifically, UCP 590 “International Stand by Practices”. • The great operative difference between the letter of credit and the normal letters of credit is that in the normal letter of credit the documentation must be presented to the bank as a necessary condition to collect the export and in the letter of credit, there is only to present the documentation to the bank to collect if the importer has failed to pay within the stipulated period.

5. The main advantages of the standby letter of credit compared to normal letters of credit • The standby letter of credit is less operationally complex for the exporter than the normal letters of credit since the exporter only has to present the documentation required in the letters of credit in the event of default by the buyer. • In relation to ordinary guarantees, there is an absolute separation between them and the commercial operation they cover.

6. Thus, while a commercial dispute over the compliance or non-compliance of any of the parties may contaminate the guarantee represented by the ordinary guarantees, the letter of credit is not affected in any way, and in the event of non-payment, the exporter presents the stipulated documents to the bank and the bank (if the documents are formally compliant) must pay. • The standby letter of credit is issued under the international CCI regulation, while the ordinary guarantees are subject to the legislation of the countries of the banks that guarantee the operations.

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