Pros And Cons Of Standby Letter of Credit
Standby Letter of Credit have the advantage that it makes the operations run more smoothly when in comparison to other credit documents. In the case of SBLC the original documentation related to the transport of the merchandise in sent from the seller to the buyer without intermediaries. The operations are then complete upon arrival of merchandise.
The verification process for Standby Letter of Credit is also quicker and less rigorous. The information received by the importer has already been simplified.
For other type of credit documentation, Letter of Credit and so on, the document flow is more complicated. The reason is that Letter of Credit have more participants in the process and there is information running from an advisory bank to an issuing bank. The verification process for this type of document usually takes ten days. If the merchandise arrives by boat, sometimes the documents arrive later. Additionally in order for the shipping company to transport the merchandise, a bill of lading has to be issued.
It is easy to confuse the functions of Standby Letter of Credit with those of regular letters of credit. For one, some people tend to forget that though Letter of Credit can be used as form of payment, SBLC cannot. However, both letters of credits can be used as a way to protect the holder on non payment. Both tools are different in that sense and that is why they should not be compared.
One of the disadvantages that we can note on Standby Letter of Credit is in terms of the protection it provides to the buyer. Letters of credit are generally providing equal protection to the parts involved in the trade. However, the process may be more favorable to one side more than to the other. According to the International Standby rules or ISP98 the revision process will take from 3 days up to a week. The buyer is more at a disadvantage because the period may be too short to review details or typos within the document that may hinder delivery. Some people compare a SBLC to blank checks to the order to seller.
Another drawback is directly related to the youth Standby Letter of Credit. The law that concerns it is strange and uncertain, and its universality is below that of other similar credit documents.
However, if we put the advantages and disadvantages of Standby Letter of Credit in terms of a protection against the risk of non-payment balance, the benefits may outweigh the disadvantages.
