Letter of Credit vs Standby Letter of Credit

A letter of credit is the tool in which a bank guarantees the payment to the alternate party in the event of default by the account holder to the issuing bank. In other words, it offers a guarantee to the other bank involved in the transaction in addition to his customer that it guarantees the full payment to the trade by its customer, in the event of any default the bank or other financial institution will return to fulfil all of the terms and conditions and also will exactly act as party to the contract.

It may also be concluded in a way that the rights and responsibilities will automatically transfer in case of default. Whereas standby letter of credit is a guarantee made by the lender to the beneficiary that in case of failure in charge within a stipulated period, the bank will fulfil the arrangement on behalf of their its client.

As with any other tool this also facilitates and ensures the achievement of global trade among the global community.

The principle goal of both the letter of credit and standby letter of credit would be to minimize the risk of the parties to the agreement. The seller and buyer can make any kinds of letter of credit as per the comfort of the equally, the type of letter of credit also depends on strength of the company relationship between the parties.

Both the parties will try its level best to maximum secure the trade specially when they are new to each other, in situations such as this confirmed letter of credit is the perfect way to secure the credit risk. The letter of credit ma relaxes the conditions and conditions in case there is longstanding business relationship between the parties.

This may also depend on the quantity of the trade that’s the bigger the quantity the greater security is needed.

As already discussed there are various types of the tools as per the ease of the seller and buyer to the trade. The several kinds of letters of credit are commercial, export/import, transferable and non-transferable, confirmed and unconfirmed, revocable and irrevocable, standby, revolving, back to back etc..

Ever type of letter of credit has its own benefits and limitations as per the agreed terms and conditions mentioned by the parties to the contract.

In the same way, standby letter of credit has also another type of instruments such as an immediate cover standby, A performance standby, A bid bond or tender bond , Advance bond , financial standby, industrial standby, counter standby, insurance .

By way of example, a financial standby letter of credit would be an irrevocable undertaking that is it cannot be revoked before the permission taken from the beneficiary to the contract and it will make 100% payment upon the default of this prime responsible party nonetheless in performance standby letter of credit the 50% payment will be made by the party upon the default of the prime responsible party.

The concluding remarks of this correspondence of credits would be that these are the main carriers to facilitate the trade across the country boundaries. These tools further enhanced and strengthen the credibility of the global transactions.

There are many benefits of the instruments like the facilitation of international trade, secure expansion of company around the globe, highly customizable, and provider receives its cash on the fulfilment of all of the transactions thus it is totally credit risk free small business transactions.

Two big dangers are involved in international commerce one can seriously affect the seller and other can badly affect the purchaser, and this risk can be managed through such instruments. The vendor is at credit risk means it would not be possible to collect the sum after dispatching the goods ordered by the client this risk can be handled through letter of credit and in a better way through confirmed letter of credit.

The buyer into the trade is at a higher risk that he will get the goods that are not the same as the goods ordered by the buyer, this risk can be handled by the letter of credit at sight which means the bank will pay to provider after the review of all goods and confirmation of the required documents cited in the contract and ensure whether the goods are according to the stipulated conditions of the agreement or not.