Stand- By letter of credit for international business


Stand-By Letter of Credit is a guarantee of payments

Guarantee or Stand- by letter of credit is a type of commercial letters of credit, which is an agreement on payment of the agreed amount by the bank instead of the buyer to the supplier of goods or services in case of failure of fulfillment of contractual obligations by the importer.

Usually the stand-by letter of credit is a guarantee of obligations of both parties. It is opened for the duration of the contracts signed between the parties, or for delivery of goods period. It may be closed earlier by mutual agreement of both parties.

This type of financial instrument is issued in many countries in Europe, as well as in Asia and the Middle East in addition to the contract between business partners, stipulating the importer's payment scheme to the exporter. It shall enter into force only in case of a breach of contract by the importer.

The main difference between the letter of credit and the bank guarantee is the presence of uniform rules and regulations for issuance every type of letter of credit, which is not common in the procedure of opening the guarantee. That is, in the case of guarantee, the bank will require only the documents listed as necessary by the exporter. When you open the stand- by a letter of credit, the standards for all the documents, as well as a list of them, are dictated by the set of "Uniform Customs and Practice for Documentary Credits". This increases the degree of protection of the interests of participants in the transaction and separate states, not governed by the laws.

What are the similarities between the letters of credit and guarantees?

1. Ensuring the protection of the interests of each of the business partners in transaction is their main function.

2. Both are the obligation of the bank to transfer funds from the buyer to the supplier if the appropriate documents are available.

3. Payment under the stand-by letters of credit and bank guarantees occurs only in case provision of all the necessary documents under the conditions of issuing the financial instrument by the exporter. the exporter clearly defined in terms of the financial instrument opening documents.

4. Both instruments are issued by banking institutions under the provision of documentary evidence of the necessity to use these instruments by the applicant.

What is the difference between them?

1. The main intention of issuing the letter of credit is its further application. That is, a letter of credit is a form of trade settlement. While a bank guarantee is designed to provide the additional protection of the transaction, if one of its participants failed to fulfill his obligations.

2. Guarantee or stand-by letter of credit is a payment method available in various forms. A bank guarantee is a way to cover various commitments, including payments. This means that the guarantee is a financial instrument with a broader field of application.

3. Letters of credit are considered as transference instrument designed to optimize settlements between the importer and the exporter. Guarantees may be of the transference nature very rarely. This can sometimes become a reason of abuse by unconscientious parties of the transaction.

The advantages of usage

For the importer

1. Absence of advanced payments for the goods.

2. Possibility of deferral of payments when receiving the goods.

3. Confidence in making payment by the issuing bank in any force majeure circumstances.

4. Confidence in performance of obligations of the issuing bank to the exporter.

5. Possibility to close the stand-by letter of credit in advance, if all the obligations to the exporter have been executed.

For the exporter

1. The guarantee of payment from two banks.

2. Prompt payment under the stand-by letter of credit in case of failure of the importer\'s obligations.

3. Absence of the recipient's risks associated with sending the goods without any advance payment.

Therefore, we can summarize that perfect transparency, simplicity and controllability of this financial instrument not only made it recognized by the business world, but also brought the international trade relations to a higher level. We offer to issue a Stand-By Letter of Credit with us and save both time and money.