Standby letters of credit are created as a last resort by importers and exporters only in case that something goes wrong. Standby letters of credit protect buyers and sellers of non compliance to the conditions agreed by both sides.

Generally, in order for a Standby letter of credit to be made effective something has to go wrong in an international transaction. It works as a guarantee that protects both parties involved in the trade: importer and exporter. In the case that the conditions in the agreement were violated, the beneficiary of the Standby letter of credit will not be compensated because the bank will be notified not to give funds agreed to the company.

Standby letters of credit have characteristics that we discuss below:

They use SWIFT or authenticated telmex messages in order to deliver information outside borders. The banks are crucial in the validation of these documents because they are the ones that dictate whether or not the beneficiary is able to collect or not.

One of the attractive features of Standby letters of credit is the fact that they can be originated in any country. As long as the banks have available funds in order to cover the amounts, there are no boundaries to the amounts that they can be issued for.

There are different kinds of Standby letters of credit: Irrevocable. Revocable, Revolving, and Transferable.

There also are different methods of payment: Documentary Credit, Advance payment, Documentary collection and Direct payment

The Standby Letter of Credit has the same characteristics of Import Letters of Credit but unlike them, the bank is required to establish a security abroad in support of a contract, payment or breach of conditions.

Let us now talk about some of the benefits of Standby letters or credit have:

Standby letters of credit are used to bring accountability and transparency to international trade. They reconcile the interest of importers and exporters. This benefit is accentuated by the fact that they are accepted in many countries around the world as credit documentation.

Second of all, they follow international trade laws that regulate transactions around the world. Therefore, Standby letters of credit help avoid misinterpretations of laws while protecting buyers and sellers.

Lastly, they contribute to the efficiency of international transactions for they set the process for conditions to be followed.