The Advantages of the Standby Letters of Credit.
The standby letter of credit differs from commercial credit in that
the standby is opened to cover the account party's business obligations.
In other words, the standby will only be used when the account party
defaults under its obligation to the beneficiary.
Standby letters of credit include every letter of credit (or similar
arrangement however named or designated), which represents an obligation
to the beneficiary on the part of the issuer. In essence the issuing
bank is substituting its creditworthiness for that of the applicant.
Standby Letters of Credit are used:
- To repay money borrowed by, advanced to, or for the account of
the account party.
- To make payment on account of any evidence of indebtedness undertaken
by the account party.
- To make payment on account of any default by the account party in
performance of an obligation.(Performance and Bid Bonds)
Does this mean that the standby acts as a patrolman watching over the
performance of the account party? Absolutely NOT! The standby credit,
just like the commercial credit, is payable against presentation of
documents. The bank's role is to examine documents. The bank does not
determine either default or actual performance of the account party.
The bank is not concerned with, nor bound by, the underlying agreement
between the account party and the beneficiary. Payment to the beneficiary
will only be made against documents, which comply with the terms and
conditions of the standby credit. These documents will deliver the facts
as to the default, but the bank is neither required nor obligated to
investigate these facts. This is true even to the extent that the account
party disputes the facts contained in the documents.
The documents, usually but not always, presented by the beneficiary
under a standby letter of credit are:
- A sight draft
- Beneficiary's written statement reciting the facts as to the default
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