What Is a Standby Letter of Credit?

Standby letter of credit is also called SBLC (standby letters of credit). It is also called secured letter of credit, which refers to a letter of credit that is not for the purpose of paying off the price of a commodity transaction, but for loan financing or guaranteeing debt repayment.

Standby letter of credit

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In December 1995, the General Assembly adopted

1. Irrevocability. Unless otherwise stated in the standby, or with the consent of the other party, the issuer shall not modify or revoke its obligations under the standby.

2. Independence. The performance of the issuer's obligations under a standby does not depend on:

Issuer from

Difference from general commercial letter of credit

(1) General

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There are many types of standby letters of credit. According to the different functions of standby letters of credit in basic transactions, they can be divided into the following 8 categories:

1. PERFORMANCE STANDBYto support the performance of an obligation other than payment of money, including compensation for losses caused by the applicant's breach of contract in the underlying transaction.

2. ADVANCE PAYMENT STANDBYused to guarantee the applicant's obligations and responsibilities to the beneficiary's advance payment. This type of standby letter of credit is usually used for the advance payment of 10% -25% of the total contract price paid by the owner to the contractor in the international engineering contracting project, and the advance payment paid by the importer to the exporter in the import and export trade.

3 Counter guarantee standby letter of credit (COUNTER STANDBY)-also known as counter-standby letter of credit, it supports another standby letter of credit or other commitments issued by the beneficiary of the counter guarantee standby letter of credit.

4 FINANCIAL STANDBY-Any supporting document that supports payment obligations, including obligations to repay borrowings. At present, the standby letter of credit used by foreign-invested enterprises to mortgage RMB loans is a financing guarantee standby letter of credit.

5. TENDER BOND STANDBY-It is used to guarantee the applicant to perform contractual obligations and responsibilities after winning the bid. If the bidder fails to perform the contract, the issuer must perform the compensation obligation to the beneficiary according to the provisions of the standby letter of credit. The amount of the stand-by letter of credit for bidding is generally between 1% and 5% of the quoted price for insurance (the specific percentage depends on the tender documents).

6. Direct payment standby letter of credit (DIRECT PAYMENT STANDBY)-used to guarantee payment due, especially when there is no default in the payment of principal and interest. It has broken through the traditional guarantee nature of standby letter of credit preparation without use, and is mainly used to guarantee the maturity and interest payment obligations of enterprises when issuing bonds or entering into debt contracts.

7. Insurance Stand-by Letter of Credit (INSURANCE STANDBY)-to support the applicant's insurance or reinsurance obligations.

8. Commercial Stand-by Letter of Credit (COMMERCIAL STANDBY)-This refers to guaranteeing the applicant's obligation to pay for goods or services if payment cannot be made by other means.

According to whether the standby letter of credit can be revoked, it can be divided into a reversible standby letter of credit and an irrevocable standby letter of credit. A revocable stand-by letter of credit refers to a letter of credit that is attached to the applicant's financial situation and can be revoked or modified in the event of certain changes. This letter of credit is intended to protect the interests of the issuing bank, which issues the issuance at the request and instructions of the applicant. Without the applicant's instructions, the issuing bank will not arbitrarily cancel the letter of credit. An irrevocable standby letter of credit refers to a letter of credit that an issuing bank cannot unilaterally cancel or modify. For beneficiaries, the issuing bank's irrevocable payment commitment gives it a more reliable guarantee of receipt.