The Standby Letter of Credit (SBLC) is a guarantee issued by banks or other financial institutions for the account of the importer, in favor of the exporter, for an amount agreed at the signing of the commercial contract. It provides a guarantee to the exporter that, if due to any circumstances, the importer is unable to pay, then the bank will make the payment.
There are two types of Standby Letters of Credit: Performance SBLC and Financial SBLC.
A Performance Standby Letter of Credit is issued to ensure that nonfinancial contractual obligations are performed in a timely and satisfactory manner. These obligations can be related to quality of work, amount of work, delivery time. In case they are not met, the issuer will pay the beneficiary in full.
A Financial Standby Letter of Credit, on the other hand, is issued to ensure that financial contractual obligations are fulfilled. That means the importer pays on time provided he has received all the goods and/or services from the exporter, the beneficiary of the SBLC.
But a Financial SBLC can also be in favor of the exporter’s bank. Standby Letters of Credit are financial most of the time.
The standby letter of credit is often preferred over a documentary credit because it presents some advantages for both parties: