April 17, 2024

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Let Us Compare Letters of Credit to Standby Letter of Credit

Let us talk about some of the positive and negative aspects of the SBLC, commonly known as a Standby Letter of Credit.

Compared to other types of Letters of Credit, Standby Letter of Credit may be more beneficial for trade. The SBLC uses the original documents and the bill of lading in order to obtain payment for the merchandise from a seller to a buyer. This is all done in different parts and the process concludes when the merchandise arrives at the port.

Document verification is done at once, and it is less stringent and faster. The documents to be produced by the recipient are very simplified.

In the documentary credit, the flow of documentation is more complex. The originals must be submitted to the bank and sent later for verification to the issuing bank. The latter will give them to the payer of the order upon completion of yet another verification process. These operations usually take about ten days. For maritime short circuits (like those in the Mediterranean), the goods arrive at the port of destination, in most cases, before the documents. However, an original bill of lading must be submitted to the shipping company for them to deliver the merchandise.

However, this advantage of Standby Letter of Credit compared to documentary credit only applies if we look at these tools as a means of protection against the risk of non-payment. Let us not forget that documentary credit is also a means of payment, which a SBLC is not, and it is therefore misleading to compare two tools that do not exactly function the same way.

One of the disadvantages that we can note on Standby Letter of Credit is in terms of the protection it provides to the buyer. Letters of credit are generally providing equal protection to the parts involved in the trade. However, the process may be more favorable to one side more than to the other. According to the International Standby rules or ISP98 the revision process will take from 3 days up to a week. The buyer is more at a disadvantage because the period may be too short to review details or typos within the document that may hinder delivery. Some people compare a SBLC to blank checks to the order to seller.

Standby Letter of Credit are fairly new to the world of international trade, and therefore it is also legally new. The legislations that apply to it may be uncertain and not equally applicable when in comparison to other types of letters of credit.

If we balance the advantages and disadvantages of Standby Letter of Credit, the benefit of having protection against non-payment is the most important one.