A standby letter of credit is a guarantee of payment issued by a bank or a financial institution on behalf of client where the bank or a financial institution promises to pay a "beneficiary" in case of default by the applicant.
Historically, Standby letters of credit were developed because the US regulator legally limited bank or a financial institution US bank's authority to issue guarantees.
A stand-by letter of credit is a very flexible financial tool, making it a suitable instrument for securing a vast range of payment scenarios.
It is commonly used for international trading as it provides assurance to the seller / exporter that the payment will come through. However, a stand-by letter of credit involves quite a few complexities and therefore, one must consult with an expert if not well acquainted with stand-by letters of credit.
Types of Stand-by Letters of Credit