According to the site Credit Management World, a stand-by letter of credit is a written obligation from a bank to pay a sum of money to a beneficiary on behalf of the bank's customer in the event that the customer does not pay.
Bank Guarantee
A stand-by letter of credit can help facilitate a transaction by providing comfort to the beneficiary.The stand-by letter acts as a guarantee from the bank that the beneficiary will be paid for his goods or services.
A Solid Agreement
The stand-by letter obligates the bank to make payment, even if there are disputes between the customer and the beneficiary.
Collateral
The customer applying for the stand-by letter of credit must have a credit line or collateral equal to the value of the letter. The assets are frozen by the bank until the transaction is completed.
Popular in America
The stand-by letter of credit is used primarily in the United States and is often called a non-performing letter of credit, because it serves only as a backup should the buyer fail to pay as agreed.
Typical Uses
Stand-by letters of credit are used to guarantee repayment of loans, to ensure fulfillment of a contract, and to secure payment for goods delivered by third parties.
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