A Documentary Letter of Credit is a guarantee from the issuer (i.e., issuing bank) to the beneficiary that the issuer will pay the beneficiary money when the beneficiary provides certain documents to the issuer in a certain manner time and place. A documentary letter of credit is issued by a bank or a financial institution. The letter of credit assures the supplier (beneficiary) that they will receive payment up to the amount stated in the letter of credit, provided that the beneficiary makes a compliant document presentation. Documentary letters of credit are mostly used in international transactions, where the buyer and seller have yet to establish a strong relationship and/or operate in different countries. When an applicant takes advantage of a documentary letter of credit, he frees up capital that would otherwise be tied up with the beneficiary the form of a security deposit. Due to this ability to boost an applicant’s cash flow, documentary letters of credits are crucial parts of international trade for deals of all sizes.
What is a Standby Letter of Credit?
It is a guarantee of payment issued by a bank/Financial Institution on behalf of a client that is used as payment in case of default by the applicant.
Standby Letters of Credit are issued for use in a wide variety of commercial and financial operations.
Standby letters of credit are very much alike documentary letters of credit, their main difference is that unlike DC’s, they only become operative in case the applicant defaults, then the beneficiary in whose favor the SBLC was issued, can draw on the SBLC and demand payment.
Standby letter of credit protects the seller. Standby letters of credit are a very flexible tool, making them a suitable product for securing a wide range of payment scenarios.