The procedure for obtaining a SLOC is similar to applying for a loan. The bank issues them only after checking the applicant`s creditworthiness. The recipient of a standby letter of credit is assured that they are dealing with an individual or company that is able to pay the bill or complete the project. A SLOC is most often sought after by a company to help them get a contract. The contract is a stand-by agreement, as the bank only has to pay in the worst case. Although an SBLC guarantees payment to a seller, the agreement must be strictly adhered to. For example, a delay in shipping or incorrect spelling of the company name may cause the bank to refuse payment. In the worst-case scenario, if a company goes bankrupt or goes out of business, the SLOC issuing bank will meet its client`s obligations. The client pays a fee for each year the letter is valid.
As a rule, the fee is 1% to 10% of the total obligation per year. A standby letter of credit (SLOC) is a legal document that guarantees a bank`s payment obligation to a seller in the event that the buyer – or the bank`s customer – fails to comply with the contract. A stand-by letter of credit facilitates international trade between companies that do not know each other and have different laws and regulations. Although the buyer is sure to receive the goods and the seller is sure to receive payment, a SLOC does not guarantee that the buyer will be satisfied with the goods. A stand-by letter of credit can also be abbreviated SBLC. There are two main types of stand-by letters of credit: SLOC is often seen in contracts with international trade, which tend to involve a large monetary commitment and carry additional risks. An SBLC ensures that the buyer receives the goods or services described in the document. For example, if a contract provides for the construction of a building and the builder does not deliver, the customer submits the SLOC to the bank, which must be completed. Another advantage in global trade is that a buyer has increased certainty that the goods will be delivered by the seller. For the company facing an SLOC, the biggest benefit is the potential ease of exiting this worst-case scenario. If an agreement requires payment within 30 days of delivery and payment is not made, the seller may submit the SLOC to the buyer`s bank for payment.
Thus, the seller is guaranteed to be paid. Another advantage for the seller is that the SBLC reduces the risk of the production order being changed or cancelled by the buyer. In addition, smaller businesses may have difficulty competing with larger, better-known competitors. An SBLC can give credibility to its bid for a project and often help avoid an upfront payment to the seller.
