A standby Letter of credit (SLOC) is an agreed document that guarantees a consumer that the bank covers for the repayment if the consumer was unable to pay off. The standby letter of Credit can sometimes take this form of abbreviation – SBLC. This standby letter of credit is often used in the field of trading. This helps to limit contracts from ending unfulfilled in case your company experiences bankruptcy and may not be able to pay for the goods or services. This standby letter of credit can stand in a gap for the “credit quality and ability to repay” of a business. However, the Standby Letter of credit facilitates trade.
What you should know
- Do you know that the Standby letter of credit is of two types? “The performance SLOC and Financial SLOC: the Financial SLOC guarantees payment for goods or services respectively. While the Performance SLOC guarantees that the customer should meet up with the demand of the contract.
- Also, do you know that anyone who is receiving a standby letter of credit is assumed to be an individual or company capable of paying back the bill or complete the project (depending on the type of SLOC).
- And, do you know that you obtain the same method used in applying for a loan in SLOC? This is because the bank verifies and appraises the creditworthiness before they issue the applicant the SLOC.
How a standby letter of credit works
Just like I said earlier, the SLOC is often used by sort of businesses in order to gain a contract. The contract is what is referred to as “Standby” because it is an agreement the bank can stand-with and pay if the recipient was unable to meet up. This is to protect the seller in a worst-case and the SLOC must be followed exactly. While preparing the SLOC, you should be very careful because if anything isn’t right, the bank might not make the payment.
WHAT IF SCENARIO
Assuming a company goes bankrupt or shut down the operation what is the outcome going to be like? This is a very good question. The bank will have to fulfill the obligation of the client. Now the client is expected to pay 1% out of 10% of the total obligation every year until the letter is fulfilled or becomes valid.
Both ends are still advantaged in some aspect of the agreement and vice versa.
- Firstly, the SLOC supports a contract involving international trade and having a large monetary commitment. Of course, there are always risky in simple terms.
- Secondly, it gives a slight dis-ease to the buyers when things get into a worse scenario especially when the agreement involves payment.
- The buyer can present the issued SLOC to his/her bank for payment.
- Also, H\however, the SLOC stands in as insurance for payment in cases where payment is agreeable.
- This minimizes the risk of production orders being canceled by the buyer.
- Finaly, W\with the SLOC, the buyer is assured of receiving the goods or services contained in the document. Thus, the buyer is assured certainly of delivery.
- This is not always easy for small businesses to compete with bigger and better competitors.