Standby Letter Of Credit (SBLC): Definition, Type & Process

What Is A Standby Letter of Credit? Define Standby

What is the SBLC meaning in banking? A standby Letter of Credit (SBLC) is a legal financial document guaranteeing an on time payment to the seller in the event if buyer defaults to pay.

A standby LOC acts as a safety net for the exporters in international transactions to ensure on-time payment for shipment of goods or complete service. It is issued by the banks to mitigate the associated overseas payment risks in international trade such as distance, or lack of trust between the two parties to the contract or different laws and regulations etc.

Types of Standby Letters of Credit

Now you know what SBLC means, its time to know the types of SBLC. There are mainly two types of standby Letter of Credit. Here they are as follows:

Financial Standby LOC - By issuing a financial standby letter of credit, the respective bank or financial institution promises to pay the seller for the delivered goods or services as per the agreement within the prescribed period, simplifying SBLC payment meaning. For example, an exporter delivers goods to a foreign buyer with a promise of getting payment within 60 days. In case if the payment has not arrived, the exporter can collect payment from the buyer’s bank as per the terms of the agreement.

Performance standby letter of credit- On the contrary, in a performance standby LOC, the bank provides a guarantee of completion of a particular project as per the agreement. It is a less commonly used type of trade finance giving assurance of completed projects within the scheduled time. If a bank's client defaults, it will be reimbursed by the bank. For example, An IT company hires a contractor to build his new office. If the contractor fails, the issuing bank will pay the entire or remaining amount.

Advance Payment SBLC - If one party of the contract fails to pay the advance amount, it provides security to the other associated party.

Bid Bond/Tender Bond Standby - It provides security against a party’s failure to complete a project if the party has been awarded the bid or the tender.

Counter Standby - It is also known as a backstop or a protective SBLOC issued by a letter of credit service provider in one country to a bank in another country, requesting them to issue a new standby payment guarantee letter to the local beneficiary.

Direct Pay - It is issued in the event of financial incapability of the applicant.