What is a Standby Letter of Credit?
Standby LCs are used as a form of guarantee to cover default by a Buyer; The Buyer pays directly for goods ordered and, only in the event of non-payment by the Buyer, does the Seller claim under the Standby LC. Standby LCs are used to support regular supply contracts with Exporters. The Importer arranges for their bank to provide the Exporter with a Guarantee that, in the event that goods have been shipped and the Exporter has not been paid, the Importer's bank will guarantee payment for a pre-determined amount.
The LC is issued subject to usual International Chamber of Commerce rules and is usually payable against a written declaration of non-payment supported by a copy of the unpaid invoice and relevant shipping documentation; Standby LCs are subject to credit approval.