SBLC - Various Uses and Its Benefits

• A standby letter of credit may be defined as ‘a guarantee of payment (is a statement of guarantee by the issuing bank that the payment will be made by the buyer to the seller) issued by a bank on behalf of a client.

• If the client fails to perform an act or omission as per the terms and conditions of a particular contract, only then the role of the bank comes into being.

• In such cases, the bank would be held liable to the extent of the initial liability of the client.

• Standby Letter of Credit (SBLC) may be used by clients who have low creditability or those face various hindrances in trade due to their lack of goodwill among the suppliers.

• Here, mostly, the bank becomes the surety of the client, and thus is jointly liable with the client, and while the expiry term for a Letter of Credit is three months, that of an SBLC extends up to one year or so.

• The client may sometimes be required to produce or present before the issuing bank cash, securities or some other immovable property as collateral for the issuance of a standby letter of credit.

Advantages of SBLC

• It increases the creditability of the client, and also secures the payment to the supplier. If client have some kind of standby letter of credit then the suppliers would be more confident to supply goods to a client with relatively less creditability or creditworthiness.

• The use of SBLC is more convenient and more feasible compared to the standard letter of credit.

• A standby letter of credit may be used within both nation and international.

• With SBLC, the supplier can accept payments through bank transfer which is comparatively a more simplified and convenient method of transaction in recent times, and the cost of usage of this method of finance is relatively lower than that in case pf documentary credit, or the standard letter of credit.