Standby Letters of Credit (SBLC)

Overview

A standby letter of credit is a bank undertaking that is called on only if the applicant fails to perform or pay as agreed. Unlike a commercial LC, which is the expected way of paying, a standby is a secondary line of protection. Standbys are commonly issued under ISP98 or the UCP, and the terms of the instrument itself decide when a claim can be made.

How it generally works

1. The parties agree that a standby will support a contract or payment obligation.
2. The applicant requests the standby from a bank, which assesses the request.
3. If the bank issues it, the beneficiary holds it as protection.
4. The beneficiary may claim only if the standby's conditions are met; otherwise it expires or is released.

Potential business use cases

• Backing a supplier's open-account payment terms.
• Supporting a lease, supply, or service contract.
• Providing assurance to a counterparty in a larger transaction.

General documentation

Requirements vary by transaction, country and institution. Commonly requested items include:

• The underlying contract the standby supports
• Company and ownership documents
• Wording or draft text of the proposed standby
• Financial information requested by the bank
• Details of the beneficiary

Important considerations

• The text of the standby controls everything: amounts, expiry, and claim conditions.
• Banks usually require collateral, cash margin, or credit approval from the applicant.
• Be careful with any offer that promises an instrument without a clear, verifiable issuing bank.

FAQs