When you encounter a business transaction that requires assurance that your payment will be made — but a trade or documentary letter of credit does not fit — a standby letter of credit may be what you need. A standby letter of credit does not have to be related to the purchase of goods or services. It is based on a contractual agreement or other obligation and is drawn upon by the beneficiary only when the applicant fails to meet the underlying obligation.
Advantages of Standby Letters of Credit
Certify creditworthiness in domestic as well as foreign transactions
Eliminate the need for cash deposits or more complicated guarantees, such as bid or performance bonds
Establish creditworthiness of U.S.-based parent companies to subsidiaries overseas
Reduce banking costs, since standby letters of credit are less expensive than bonding and other credit facilities
Ensure that international transactions are properly structured