Letter of Credit (LC) and the ‘Standby Letter of Credit (SBLC) are used by Importers and Exporters in International Trade to ensure financial safety so that payment of the supplier is assured of payment once he has performed his obligation. While LC is used as a primary method of payment, SBLC is used when there is buyer’s non-performance during the sale.
Benefit of using LC & SBLC is that, the buyer gets an assurance of receiving his product or merchandise on time, and the seller gets assurance of being paid on time on completion of the job.
Buyer’s Bank (issuing bank), opens a LC in the favor of the seller promising that seller will be paid. In this way, the seller will not suffer any loss due to non-payment of the buyer. On the other hand, bank also does not pay supplier until confirmation is received that goods have been shipped, thereby safeguarding the buyer’s interest. Payment to the seller is initiated only after all the conditions or documents of the contract are completed.
Based on this, there are two types of LCs being issued, they are:
- Letter of Credit (LC) and
- Stand By Letter of Credit (SBLC)
Payment under LC depends on the performance by the supplier, whereas payment under SBLC depends on the non-performance or default by the buyer.
To simplify, LC is a primary method of payment, while, SBLC is a secondary method of payment i.e., payment under SBLC will be made only when buyer defaults in making payment to supplier.