Requirements for swift standby letter of credit. Stand-By Letters of Credit. What is a standby letter of credit

We issue stand-by letters of credit (SBLC) for our clients - letters of credit that perform the functions of a guarantee, i.e., they work only in the event of a violation of the terms of the contract. The difference between a standby letter of credit and a guarantee is that a standby letter of credit can be subject to the Uniform Customs and Practice for Documentary Credits (UCP 600), which provides certain standards for document verification that are not applicable to a guarantee.

Thus, if the beneficiary’s claim under the guarantee is accompanied by documents confirming the fulfillment of his obligations, the bank only checks the availability of these documents and, possibly, their compliance with the requirements contained in the guarantee itself. If a standby letter of credit is used, the documents must meet the standards specified in UCP 600, as well as each other, which significantly increases the degree of protection.

Subjecting standby letters of credit to the Uniform Customs and Practice for Documentary Credits also eliminates the problems associated with the fact that guarantees are generally subject to the laws of the country of the guarantor bank.

Similarities and differences between letters of credit and guarantees

Similarities:

• the letter of credit and guarantee owe their origin and existence to the need to secure the obligations of the partners under any transaction;
• a letter of credit and guarantee represent an obligation of the bank to make payment to a specified beneficiary against certain documents;
• the letter of credit and guarantee are paid upon provision of documents to the bank that are strictly defined and clearly stipulated by the terms of these instruments;
• commercial banks open guarantees and letters of credit on the basis of written confirmation that the applicant has obligations that are secured by such guarantees or letters of credit (contract, application for participation in a tender, etc.).

Differences:

• a letter of credit is opened with the intention of its use, i.e. payment under a letter of credit is a phenomenon that occurs in the normal course of circumstances (payment method).
• A letter of credit is used as a method of payment in one form or another. The guarantee can cover almost any type of obligation (guarantee of return of advance payment, fulfillment of contractual obligations, tender obligations, loan repayment, payment customs duty, payment of a fine or compensation established by the court, compliance with the warranty period for the operation of equipment, a guarantee of payment of a court bond, a guarantee of payment of the transfer amount for a football player and many others). The scope of guarantees is thus much wider than that of letters of credit;
• documents provided under a letter of credit have clear regulations presented in the “Uniform Customs and Practice for Documentary Credit”
  letters of credit”, which were developed by the International Chamber of Commerce in Paris and published (Uniform Customs and Practice for Documentary Credits, 2005 Revision, ICC Publication No. 600). Documents provided under a guarantee are, as a rule, regulated exclusively by the description given to them in the text of the guarantee itself;
• from a technical point of view, the form of the letter of credit, the names of the fields, the basic rules for issuing letters of credit are quite unified, while the format of the guarantee is not clearly established, although there are still fundamental elements without which the guarantee cannot exist as a full-fledged instrument;
• The obligations of the parties under a foreign currency letter of credit are regulated by UCP 600, which have received worldwide recognition, approval of the local legislation of many countries, and on the basis of which the parties can apply for dispute resolution to international arbitration at the International Chamber of Commerce. Letters of credit in hryvnia are regulated by NBU instruction No. 135 “On non-cash payments in the economic turnover of Ukraine”, which provides a not entirely complete, but still a description of the rights and obligations of the parties under the letter of credit. The obligations and actions of the parties under bank guarantees are also governed by the rules for first demand guarantees, which are called Uniform Rules for Demand Guarantees, ICC Publication 458, reprinted in 1995 (abbreviated as URDG 458). URDG 458, for many reasons, has not received such distribution and recognition from the world community as UCP 600, although they are used quite often. In addition, the guarantees opened by Ukrainian commercial banks, are subject to the provisions enshrined in Civil Code Ukraine in relation to guarantees and sureties, which are not sufficiently complete to eliminate the variety of issues that arise in practice when using bank guarantees;
• A letter of credit is very often a transferable instrument, since it allows optimization of payments between partners. In rare cases, a guarantee can be transferable, since all that is required to receive funds under a guarantee is a demand for payment, which creates certain grounds for abuse of this instrument.

(exporting association or bank) to make a payment within the specified amount in the event of failure by the applicant (importer) to fulfill its obligations under the main contract against the provision of documents by the beneficiary, in particular his statement of “non-fulfillment” with attached unpaid drafts.

A standby letter of credit is used in cases where one of the parties to a transaction wishes to obtain maximum performance of contractual obligations by the other party.

A standby letter of credit is a reliable guarantee of full and timely repayment of debt on a loan in international trade. In contrast, the regulation of which is subject to the laws (including standby letters of credit) are regulated, to which all banks participating in international payments have joined.

A standby letter of credit is a documentary letter of credit that can be used by the beneficiary only in the event of default under the transaction to which it relates. Standby letters of credit are subject to the provisions of ISP98 (International Stand-by Practice) rules. A standby letter of credit is a guarantee of full and timely repayment of debt under an installment plan contract. Unlike a bank guarantee, a standby letter of credit is not subject to national laws.

Standby letters of credit initially developed due to the fact that in the United States the law limited the rights of banks to issue guarantees.

Standby letters of credit confirmed by first class foreign banks, give the beneficiary a 100% guarantee of payment for the goods supplied (work performed, services rendered). The beneficiary completely minimizes its risks and is ready to supply the goods. A standby letter of credit is opened on the basis of an application and sent to a first-class foreign
bank (or to the beneficiary's bank) that provides the standby letter of credit to the beneficiary.

Payments under a standby letter of credit are made by banks on the basis of a statement by the beneficiary that the applicant under the standby letter of credit has not fulfilled its obligations. However, banks do not check the authenticity of such a statement, i.e. make the payment unconditionally. Thus, a standby letter of credit can be considered as a guarantee to ensure payment in the event that the applicant under the standby letter of credit fails to fulfill its obligations under the contract.

Advantages of a standby letter of credit for the buyer (applicant):

• the ability to receive goods without prepayment;
• the possibility of receiving goods with deferred payment;
• the possibility of temporary use of funds from the issuing bank of a standby letter of credit in the event of a “guarantee” event and failure to make payment on time;
• guaranteed by the issuing bank of the standby letter of credit or first-class foreign bank fulfillment of obligations to the beneficiary;
• the buyer has the opportunity to defer payment until the relevant documents indicate that the goods have been sent in full and of appropriate quality to the specified place (payment is made after the goods have been shipped and documents have been provided);
• the possibility of early termination of the standby letter of credit in case of fulfillment of obligations to the beneficiary.

Benefits of a standby letter of credit for the seller (beneficiary):

• double guarantee of payment for the delivered goods - from the issuing bank and from a foreign bank;
• speed of receipt of funds under a standby letter of credit in the event of failure by the applicant to fulfill its contractual obligations;
• the ability to ship goods before payment with a 100% guarantee of payment for the goods;
• the opportunity to increase supply volumes, promote goods (services) to new markets, and gain competitive advantages.

Standby letter of credit is a specific type of documentary letter of credit. Another name for it is a Stand-by letter of credit. He is credit institution(drawn up in writing) to the supplier in making payment for the buyer in the event of the latter’s failure to fulfill the terms of the contract. Initially, this type of payment arose in the United States in order to circumvent national legislation that prohibited banks from using guarantees.

Therefore, a standby letter of credit has features that are characteristic of both guarantees and traditional documentary credits.

Features of a standby letter of credit

Considering that a standby letter of credit is a documentary letter of credit, then it corresponds to common features characteristic of these forms of calculation, including:

• the obligation of the credit institution to make a payment for the payer in the event of the latter’s failure to fulfill the terms of the agreement;
• guaranteeing the supplier payment for goods and services in full;
• coverage by this letter of credit for the entire duration of the contract;
• the possibility of using a letter of credit form of payment specified in the terms of the contract between the parties;
• the need to draw up an application for a letter of credit;
• compliance with international legislation governing the letter of credit form of payment, UCP.

Specific characteristics of a standby letter of credit that distinguishes it from guarantees and documentary letters of credit

The standby letter of credit also has some specific features that distinguish it from other types of letters of credit, as well as guarantees. Among them it should be noted:

• The use of a letter of credit only in case of failure by the payer to fulfill the terms of the contract (in the usual documentary letter of credit the payer makes payment under the letter of credit after checking the shipping documents provided for in the contract).
• Classifying a standby letter of credit as additional security for both the exporter and the importer. The first is guaranteed to receive payment for services performed and goods supplied, and the second will be provided with a refund of the advance payment, if any, if the supplier violates the terms of the contract. Therefore, a standby letter of credit is considered a more universal form of payment than a regular documentary one.
• It operates outside the framework of the national legislation of countries, which distinguishes it from ordinary guarantees, and also makes it a more reliable payment document.

Scheme of operation of a standby letter of credit

The possibility of using a letter of credit form of payment must be indicated in the contract concluded by the counterparties. It is usually opened by the importer's bank (which is the applicant) in favor of the beneficiary (recipient of payment under the contract). The importer's bank is also called the issuing bank. However, the supplier has the right to independently open a standby letter of credit. In this situation, the payer will be the beneficiary, and the supplier will act as the orderer.

If the payer makes payment for the delivered products, and the supplier properly ships them, then the need to use a letter of credit disappears. If one of the partners violates the terms of the contract, a standby letter of credit helps the parties to the transaction in resolving the conflict situation. So, if the payer has not paid for the goods delivered, the supplier submits a statement to the bank about non-receipt of payments together with copies of documents evidencing shipment. In such a case, the issuing bank is obliged to make a settlement with the supplier even if the payer disagrees. Therefore, a standby letter of credit provides for unconditional payment under it. In this situation, the payer is obliged to pay the bank for the payment made by the latter.

The form of payment under consideration can be applied to any type of transaction.

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With any transaction, things can go wrong, so it's a good idea to have a backup plan. Whether the purchase is for completed service or the shipment of physical goods, a standby letter of credit can provide protection.

What is a standby letter of credit?

A standby letter of credit is a document issued by a bank. This document serves as a guarantee: the bank promises to pay the “beneficiary” if something does not happen.

Standby letters of credit, such as standard letters of credit, can be used for international trade as well as domestic transactions in your country.

Letter of credit provides bank guarantee, which appears to be an uninterested third party. If the bank client cannot do something (for example, pay on time, complete a project on time, or fulfill certain terms of the agreement) bank- not the client who could not deliver - pays the beneficiary.

Example of LOC financial expectation: The exporter sells the goods to a foreign buyer who promises to pay within 60 days. If payment is not due (and a standby letter of credit was used), the exporter can collect payment from the importer's bank. The importer's bank has already assessed the importer's loan, and the bank assumes (or hopes) that the importer will repay the bank. Sometimes a deposit is required to receive a letter. That's an example financial standby letter of credit.

Example of waiting for LOC to work: the contractor agrees to complete the construction project within a specified period of time. When the deadline expires, the project is not yet complete. If a standby letter of credit has been used, the contractor's client may collect payment from the contractor's bank (these funds may serve as a penalty, financing to attract another contractor to switch to average project or "something for your time").

This is an example of a standby letter of credit .

The process works as follows:

1. Jack and Jill make a deal (perhaps Jack is an importer who wants Jill to send him 10,000 widgets on open credit, or perhaps Jack promises to build a bridge for Jill's town next August)
2. Jill doesn't want to risk Jack not keeping his promises, so she asks Jack to obtain a letter of credit as part of her agreement.
3. Jack asks his bank for a backup loan letter. Since he has sufficient credit and collateral, the bank issues a letter
4. Jack's bank sends a letter to Jill's bank
5. Jill reviews the letter of credit to make sure it is acceptable and decides that it is
6. If Jack does not meet his obligations, Jill submits documentation to Jack's bank as required by the letter of credit (possibly using her bank or other banks as intermediaries)
7. Jack's bank pays Jill (again, possibly indirectly) and Jack will have to pay back his bank

For a visual demonstration of the process, see an example of how money and documents move.

Who do you trust more?

By putting the bank on the hook for payment, the beneficiary can be more confident that she will actually receive the money. Using an export transaction as an example, there are many reasons why a buyer might not pay, including:

• The buyer has a cash flow hash and is waiting from his own customers
• The buyer went out of business
• Buyer's assets frozen amid political unrest
• The buyer is dissatisfied with the seller
• The buyer is dishonest

The bank is financially more stable than most buyers, and the bank does not treat it with disputes between buyers and sellers; the standby letter of credit will be paid if the beneficiary satisfies the requirements of the letter and the bank is still in business.

If the beneficiary is concerned about the stability of the bank, a letter of credit can also be used . The beneficiary simply needs to have faith in the confirming bank.

Differences between standby letter of credit and letter of credit

A standby letter of credit is similar to a standard (or "commercial") letter of credit: the bank promises to pay the beneficiary as long as the beneficiary produces documents and meets the requirements of the letter of credit.

What is the difference? A standby letter of credit is a safety net. Like most security systems, the goal is to avoid using it. When someone is paid a standby letter of credit, it means Something went wrong.. With a commercial letter of credit, on the other hand, everyone is bound by hope and expectation that payment will take place.

Standby letters of credit are also unique because they can include a component (or negative, if you want to). If the service is not performed, the beneficiary receives payment.

Finally, standby letters of credit are often used for domestic transactions. This can include everything from building projects to turning on electricity. Commercial letters of credit are most often used in international trade.

There are other varieties. Read about the different types of letters of credit.

How to obtain a standby letter of credit

If you need a standby letter of credit, ask your bank to issue one. You will most likely need to talk to someone in the bank's commercial or international trade department. Be sure to take plenty of time to understand how this works and under what circumstances you will be responsible for payment.

If you want someone else to use a standby letter of credit, ask for one as part of your agreement and insist on irrevocable letter of credit. Be sure to work closely with your bank and your solicitors to understand what you need to do to collect payment - letters of credit are notoriously complex and it is difficult to meet all requirements. If you do not meet all requirements smooth, you don't get paid.

A letter of credit is a conditional obligation of a bank to make payment upon receipt of specified documents. Exist different kinds letters of credit. In this article we will look at what a standby letter of credit is.

Standby letter of credit STANDBY LETTER OF CREDIT (SBLC)- this is a written obligation of the issuing bank to the supplier to make payment for the buyer in the event that the latter fails to fulfill its contractual obligations and the supplier presents a written demand for payment.

Letters of credit are mainly used in international payments, sales of real estate, and purchase and sale of businesses.

According to statistics, up to 15% of international payments are made up of letters of credit, due to the fact that this instrument allows buyers and sellers who do not know each other well enough to obtain some kind of insurance in fulfillment of their obligations to supply goods and payments that the bank guarantees to them.

In addition, this form of payment is mainly used when conducting international trade financing operations, which allows buyers and importers from all countries to attract foreign money.

Advantages and Disadvantages of SBLC

• SBLC has a more universal, convenient and less complex procedure for processing documents and conducting international trade transactions
• A standby letter of credit allows original documents to be sent directly from the sender to the recipient and used immediately from the moment the goods arrive.
• SBLC allows for faster and less stringent document verification.
• The procedure for checking original documents by banks takes about 10 days.
• Often, in cases of short sea transportation, the cargo arrives at the port of destination earlier than the documents accompanying the transaction. For delivery and customs clearance of goods, you will need to provide the original bill of lading.
• The use of a letter of credit is not only a direct form of payment, but also a financing tool in some circumstances, which an SBLC is not. Regarding the disadvantages, the SBLC is less reliable for the buyer than a letter of credit, but it strikes the right balance between the parties to the transaction.
• Another disadvantage is its “novelty”, which makes it uncertain due to the small number of judicial precedents.
• Still, the advantages of an SBLC relative to a conventional letter of credit as a protection against non-payment outweigh the disadvantages, especially in the case of repeated standard transactions in the trading relationship between the recipient and the seller. For one-time transactions, a regular letter of credit is more profitable.

Similarities between Letters of Credit and Guarantees

1. Ensure the fulfillment of partners’ obligations.
2. Ensure the bank’s obligation to pay the payment upon provision of the required documents
3. Payment is made subject to the provision of clearly agreed and executed documents to the bank

4. The basis for the bank to issue a guarantee and letter of credit is written confirmation of the applicant’s obligations that are secured by such guarantees or letters of credit.

Differences between letters of credit and guarantees

1. A letter of credit is opened with the intention of its use. The guarantee is used to secure obligations and is used if, during the implementation of the transaction, one of the parties is unable to fulfill its obligations.
2. The scope of application of guarantees is much wider than that of letters of credit.
3. A letter of credit is most often a transferable instrument that simplifies payments between partners. The guarantee can only be transferable in certain cases, because all that is needed to receive funds under a guarantee is a demand for payment, which creates certain grounds for abuse of this instrument.

Description of the scheme of working with the SBLC standby letter of credit

SBLC is a convenient form of payments between companies located in different countries, which involves the fulfillment of the bank’s obligations to pay the foreign supplier after shipment of the products.

Payment to the supplier is made under import contracts only if he provides the documents specified in the letter of credit. In most cases, this is a set of documents confirming shipment.

Reducing the risk of trade transactions is not the only advantage of a letter of credit. The most important advantage of this banking instrument- the opportunity for the buyer to receive a deferment on repayment of the letter of credit. The company has received the goods foreign company, may not pay the bank immediately, but gradually, for example, up to 3 years from the date of shipment of the goods. In this case, importers have the opportunity not to distract from business own funds, but work for the bank's money.