It is seen as a sign of good faith since it shows the buyer’s credit quality and ability to make payment for goods or services even if an unforeseen event occurs. Since the parties to the contract do not know each other, the letter promotes the seller’s confidence in the transaction. A standby letter of credit serves as a safety net by assuring the seller that the bank will make payment for the goods or services delivered if the buyer fails to make the payment on time.Ī standby letter of credit is often required in international trade to help a business obtain a contract.An SBLC is frequently used in international and domestic transactions where the parties to a contract do not know each other.A standby letter of credit (SBLC) refers to a legal instrument issued by a bank on behalf of its client, providing a guarantee of its commitment to pay the seller if its client (the buyer) defaults on the agreement. The bank payment to the seller is a form of credit, and the customer (buyer) is responsible for paying the principal plus interest as agreed with the bank. In case of an adverse event, the bank promises to make the required payment to the seller as long as they meet the requirements of the SBLC. Some of the risks include bankruptcy and insufficient cash flows on the part of the buyer, which prevents them from making payments to the seller on time. In such a case, the SBLC ensures the required payments are made to the seller after fulfillment of the required obligations.Ī standby letter of credit is used in international or domestic transactions where the seller and the buyer do not know each other, and it attempts to hedge out the risks associated with such a transaction. Updated What is a Standby Letter of Credit (SBLC)?Ī standby letter of credit, abbreviated as SBLC, refers to a legal document where a bank guarantees the payment of a specific amount of money to a seller if the buyer defaults on the agreement.Īn SBLC acts as a safety net for the payment of a shipment of physical goods or completed service to the seller, in the event something unforeseen prevents the buyer from making the scheduled payments to the seller.
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