Benefits and Uses of SBLC

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SBLC - Various Uses and Its Benefits
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• A standby letter of credit may be defined as a
  guarantee of payment issued by a bank on behalf
  of a client that is used as Payment of last
  resort should the client fail to fulfil a
  contractual commitment with a third party.
• This means that if and only if the client fails
  to perform an act or omission as per the terms
  and conditions of a particular contract, only
  then does the role of the bank comes into being.

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• In such cases, the bank would be held liable to
  the extent of the initial liability of the
  client.
• This method of financing which involves the use
  of SBLC Standby Letter of Credit may be used by
  clients who have low creditability or those face
  various hindrances in trade due to their lack of
  goodwill among the suppliers.
• Contrary to this, a letter of credit is a
  statement of guarantee by the issuing bank that
  the payment will be made by the buyer to the
  seller.

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• Here, mostly, the bank becomes the surety of the
  client ab initio, and thus is jointly liable with
  the client, and while the expiry term for a
  Letter of Credit is three months, that of an SBLC
  extends up to one year or so.
• The client may sometimes be required to produce
  or present before the issuing bank cash,
  securities or some other immovable property as
  collateral for the issuance of a standby letter
  of credit.
• Collateral in simple terms is a mortgage or
  security at the bank for security purposes.

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• Advantages of SBLC are that, as mentioned above,
  it increases the creditability of the client, and
  also secures the payment to the supplier.
• This would mean that the suppliers would be more
  confident to supply goods to a client with
  relatively less creditability or
  creditworthiness, which they otherwise would have
  been apprehensive or unwilling to do.
• Besides, a standard letter of credit is used
  mostly in case of international trade while a
  standby letter of credit may be used within the
  nation, for purposes concerned with construction
  activities etc.

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• Moreover, the supplier can accept payments
  through bank transfer which is comparatively a
  more simplified and convenient method of
  transaction in recent times, and the cost of
  usage of this method of finance is relatively
  lower than that in case pf documentary credit, or
  the standard letter of credit.
• Thus, the use of SBLC is more convenient and more
  feasible compared to the standard letter of
  credit.

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