Stand by Letter of Credit

Letter of credit is essential for small business owners, they not only help to safeguard the rights and interests of the parties involved but also help to develop and maintain relations with other businesses. Letter of credit helps to assure the supplier that no matter what, payment would be made.

That’s where SBLC comes in, standby letter of credit is the financial guarantee a bank claims when their client i.e. the applicant is not able to pay the beneficiary. As a last resort, the bank will pay on its client’s behalf.


SBLC is a form of a loan given to the company i.e. the applicant; this is helpful to small businesses who want to obtain big contracts. Therefore, businesses should not take standby letter of credit lightly because it’s not just a “get out of the payment” card; it helps to prove the credibility of the firm, SBLC can be a very useful financial tool in the trade business when used correctly.

The bank checks your solvency i.e. your ability to pay and creditworthiness before issuing an SBLC, the procedure is similar to a commercial loan where you have assets or funds to a backup standby letter of credit.

In the business of import and export, SBLC is used as an insurance against the risk of not receiving the payment. Therefore, it is not used until a worst-case scenario comes where the company closes down or declares bankruptcy etc.

Unlike traditional loans, the bank will require a standby of letter of credit fee of between 1-10% of the SLOC amount before issuing the letter. This fee is usually charged per year so that the letter of credit is still valid and if the terms of the contract are fulfilled early, you can cancel the SLOC without additional charges.



There are two main types of standby letter of credit where both are set on different conditions to help the businesses choose the best one:



It is an irrevocable form of a letter of credit where the bank guarantees that it will pay the beneficiary in case the applicant fails to. This one of the most common forms of SBLC used where big companies want to make sure that a comparatively smaller company will be able to pay them.

e.g.: If a client fails to pay in 45 days as agreed upon in the letter then the seller can go to the client’s bank with the issued standby letter of credit, the bank will first review the required documents and the fulfillment of conditions as required by the letter then the bank will proceed to pay him.


It is an irrevocable form of letter credit which is non-financial based. The bank has to pay the beneficiary if the client did not fulfill the non-financial/ performance-based conditions which have to be fulfilled.


Why should you pick standby letter of credit among other different types of letter of credit? The benefits range from price, speed of the process, to trust-worthiness.

  • It helps the buyer to obtain contracts because it is a sign of solvency i.e. he has enough funds to back up his agreement.
  • The buyer has the advantage where the seller has to provide goods strictly because of written conditions in the SBLC.
  • The cost of obtaining a standby letter of credit is comparatively lower to documentary credit or the standard letter of credit.
  • The usage is much more simplified compared to a standard letter of credit as original documents have to be produced and the process is much faster compared to the documentary credit.
  • The buyer has an increased assurance that the goods will be delivered by the supplier and upon fulfilling the terms that the buyer is satisfied with the goods, the seller will be paid.
  • The buyer has an easier chance of getting the supplier to sell because of the standby letter of credit.
  • As it is irrevocable, the buyer cannot change the standard of goods or change the order.
  • The bank is the third party in the agreement who doesn’t concern themselves with the dispute among the parties and certain conditions have to be fulfilled for the bank to proceed with the payment