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Letter of Credit (LC)

is a type of letter of credit in which the payment is required to be made on the date of maturity in accordance with the terms of credit.

Standby Letter of Credit (SBLC)

is a legal document that guarantees a bank’s commitment of payment to a seller in the event that the buyer–or the bank’s client–defaults on the agreement.

Bank Guarantee (BG)

is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met.

Standby Letter of Credit (SBLC) and Letter of Credit (LC) are both used in international trade to ensure financial safety for importers and exporters. While LC is a primary method of payment, SBLC serves as a secondary method used when there is a risk of the buyer’s non-performance during the sale.

A Letter of Credit is issued by the buyer’s bank (issuing bank) in favor of the seller, guaranteeing that the seller will be paid. It provides assurance to the seller that they will not suffer any loss due to non-payment from the buyer. The bank also safeguards the buyer’s interests by not making the payment to the supplier until confirmation is received that the goods have been shipped. Payment is initiated only after all the conditions and documents of the contract are fulfilled.

Standby Letter of Credit is used when there is a risk of the buyer’s default or non-payment. It acts as a backup or secondary method of payment. If the buyer fails to make the payment, the supplier can approach the bank that issued the SBLC for payment. Unlike an LC, which depends on the supplier’s performance, payment under an SBLC depends on the buyer’s non-performance or default.


A Standby Letter of Credit is, like the guarantee, commonly used to cover the risk of a contract party not fulfilling agreed obligations, for instance failure to pay or deliver. Standby LCs can be used in open account trade as well as a complement to collections and documentary credits

  • A Standby Letter of Credit Secure the payment If you as a seller trade on an open account basis or use collections, you rely on the buyer’s willingness and ability to pay as agreed.
  •  A Standby LC in your favour securing the buyer’s payment obligation will provide you with compensation should the buyer fail to pay.
  •  In order for you as a seller to further reduce your risk, if you and your buyer so agree and at the request of your buyer’s bank, the bank can confirm the Standby LC for you.
How a Standby Letter of Credit Works 

The process starts when the buyer applies for an SBLC at a commercial bank. The bank will perform its due diligence on the buyer to assess its creditworthiness, based on past credit history and the most recent credit report. If the buyer’s creditworthiness is in question, the bank may require the buyer to provide an asset or the funds on deposit as collateral before approval.


A letter of credit, or a credit letter, is a letter from a bank guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility (financial assistance that is essentially a loan).

  • A letter of credit is a document sent from a bank or financial institute that guarantees that a seller will receive a buyer’s payment on time and for the full amount.
  • Letters of credit are often used within the international trade industry.
  • There are many different letters of credit including one called a revolving letter of credit.
  • Banks collect a fee for issuing a letter of credit.
How a Letter of Credit Works

Buyers of major purchases may need a letter of credit to assure the seller that the payment will be made. A bank issues a letter of credit to guarantee the payment to the seller, essentially taking responsibility that the seller will be paid. A buyer must prove to the bank that they have enough assets or a sufficient line of credit to pay before the bank will guarantee the payment to the seller.