subject: Distinction Between Letter Of Credit And Standby Letter Of Credit [print this page] Although they consist of the same phrase, yet letter of credit and standby letter of credit are different things. There are of course similarities between them as both are financial instruments for international transactions. These financial instruments are of much use in global corporate banking between different countries and they are used as alternatives to other types of business guarantee such as the advance payment or the open account system. A letter of credit is issued on behalf of the bank of the buyer to ensure that the buyer would pay the seller the agreed amount on completion of the services. A standby letter of credit, however, is not meant for payment and is utilized as a sort of backup guarantee for ensuring the smooth flow of business. Standby letters are classified into two types, the performance standby LC and the financial standby LC.
The letter of credit
The letter of credit is one of the safest transaction options in international business. The letter of credit is issued by the buyers bank on a direct request of the buyer. There are different variations of a LC, like the confirmed LC, the future LC, the revocable LC and the irrevocable LC. In a confirmed LC, the letter is confirmed by the sellers bank with the buyers bank thereby providing full credibility to the buyers claim that the payment would be made within due date if other terms of the agreement has been observed. The revocable LC is somewhat risky because the buyer may revoke the letter. Irrevocable LCs do not have any such conditions mentioned in the agreement, therefore are always recommended. The future LC guarantees the payment at a future date, usually 30 to 60 days after completion of the services.
The standby letter of credit
There are two types of standby letters. The performance standby letter of credit guarantees a particular degree of performance as mentioned in the letter within a stipulated time. The financial standby is a more direct form of assurance. Here the standby letter entails guaranteed payment on completion of the services. Such types of backup guarantees ensure that the two parties are bound by additional legal contract with a third party and the deal would be duly observed.
Bank guarantee
Speaking about guaranteeing transactions, you should also be aware of the other most powerful financial instrument, the bank guarantee. The bank guarantee is provided by the sellers bank as opposed to the letter of credit, which is provided by the bank of the buyer. The bank guarantee is another contractual agreement letter to ensure that the overseas business between the two parties is carried on in due time. With a combination of all these strategies, plus the facility of online banking and offshore banking, the international banking experience has definitely become much smoother.
