A Standby Letter of Credit (SBLC) can be considered as equivalent to a demand guarantee from the point of view of its function and aim. It is payable on first demand against presentation of a declaration from the beneficiary stating that the applicant is in default of his obligations under the underlying transaction. The SBLC may provide for the presentation of additional documents in case of claim.
An SBLC is an independent undertaking on the part of the bank and is separate from the underlying transaction or contract.
Like any other bank guarantee, the Standby Letter of Credit may have multiple purposes:
- Tender SBLC
- Advance payment SBLC
- Performance SBLC
- Retention money SBLC
- Warranty SBLC
- Payment SBLC
A SBLC involves the same parties as a documentary credit: applicant, beneficiary, issuing bank, possibly an advising bank and a confirming bank.
The applicant will be:
- The buyer under a payment SBLC which guarantees the payment of goods or services.
- The supplier under a trade SBLC which guarantees the due performance of a contract.
A SBLC may be “financial” if the underlying relationship is of financial nature and “trade related” if the underlying relationship is a trade transaction.