What You Should Know About Standby Letters Of Credit
The main objective of a standby letter of credit is to guarantee that a transaction is done as agreed by exporter and importer. However it does not work in the same way as a letter of credit because it only protects against non-payment risks.
A standby letter of credit brings many benefits to the seller or exporters. These kinds of document will work only under the most negative scenario. Let us say that the seller did not pay the exporter as it was agreed beforehand. A standby letter of credit will be produced by the seller and used to request payment for the products sold. When this happens, the seller needs to show documents to prove non-payment. Generally, a statement or declaration of non-payment will be enough to start the process.
The seller will make the contract until it has received notification of the issuance of its guarantee of payment through a standby letter of credit. This notification is sent to the issuing bank or a second bank, located in his country and playing the same role under the documentary credit. Once ready, they are shipped to the buyer. Normally payment follows. The vast majority of transactions take place without incidents.
However when things do not go according to plan, a standby letter of credit is used. Let us say that the seller was not paid for its products for an unknown reason. He or she will then requests a certified document that proves that the buyer has not paid and presents it with any other necessary documents. The seller will show documents that prove that his or her responsibilities were fulfilled and later the issuing bank will give the payment.
For a standby letter of credit to be presented, it needs to also be followed by other information.
The original of the certificate of non-payment, written on letterhead of the seller and signed by him;
A copy of the commercial invoice;
The last one is a proof of shipment of the merchandise.
