A guarantee issued by a bank or a financial institution to pay a beneficiary on a client’s behalf in a situation where the applicant defaults, is known as a standby letter of credit. This was developed as a consequence of legal limitation put by the US regulator on the bank’s authority for issuing guarantees.
A standby letter of credit is considered quite suitable for a wide range of secure payments making it quite a flexible tool. Most commonly, it is used for international trade purposes for providing assurance to the party that it will receive the payment whatever the case it. Having said this, there are quite a few complexities involved in a standby letter of credit. This suggests that it is necessary to have a consultation with an expert in case complete information is not available regarding the procedure.
There are eight main types of standby letters of credit: