what is standby letter of credit?

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A standby letter of credit is a guarantee of payment issued by a bank or a financial institution on behalf of client where the bank or a financial institution promises to pay a “beneficiary” in case of default by the applicant.

Historically, Standby letters of credit were developed because the US regulator legally limited bank or a financial institution US bank’s authority to issue guarantees.

A stand-by letter of credit is a very flexible financial tool, making it a suitable instrument for securing a vast range of payment scenarios.

It is commonly used for international trading as it provides assurance to the seller / exporter that the payment will come through. However, a stand-by letter of credit involves quite a few complexities and therefore, one must consult with an expert if not well acquainted with stand-by letters of credit.
Types of Stand-by Letters of Credit

  1. Performance standby letter of credit
  2. Advance-payment standby letter of credit
  3. Bid-bond or tender-bond standby letter of credit
  4. Counter standby letter of credit
  5. Financial standby letter of credit
  6. Insurance standby letter of credit
  7. Commercial standby letter of credit
  8. Direct-pay standby letter of credit
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