STANDBY LETTER OF CREDIT (SBLC): WHAT IT IS AND HOW TO USE IT
Man Global Investments Ltd (MGIL) Welcomes you to the 2nd quarter of 2016, the defacto year of Standby Letter of Credit (SBLC) is a document issued by a bank that guarantees payment to the beneficiary in the event the applicant fails to fulfill an obligation (i.e. contract performance). The SLC will stipulate the requirements for making a claim against the SLC. These requirements are negotiable and must be agreed upon by both parties. International rules exist through the International Chamber of Commerce (ICC) that govern how banks handle SBLC.
A Performance Bond is a guarantee issued by a Surety (insurance co.) that stipulates the Surety will pay for the costs of completion a contract in the event of the applicant’s non-performance. The terms of a performance bond are typically predetermined by the Surety. and tend to be more common in international transactions.
The costs of a and a Performance Bond vary, with a usually more expensive. also tends to be more risky for the applicant, as it leaves one open to a risk referred to as “Wrongful Call”; whereby the beneficiary requests payment from the bank with the appropriate documents containing the necessary wording without a valid basis for the claim. Banks will NOT make any attempts to confirm the veracity of a claim.
If documents are in order the bank will pay. The bank will expect the applicant to pay them and the applicant needs to recover the monies from the beneficiary. Banks refuse to become involved in contractual disputes. A Performance Bond prevents this type of risk as an insurance co. will not pay without validating the claim, and often defending against the claim. Obtaining payment often involves legal action. This is the downside for a beneficiary.
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