Standby Letters of Credit

Standby Letters of Credit Overview

What is a Standby Letter of Credit?

An Irrevocable Standby Letter of Credit represents an obligation by a bank to the beneficiary on the part of the applicant to make a payment based on any number of scenarios. Some common uses of Standby Letters of Credit are to secure invoices, loans or leases, to guarantee performance on a project, to act as a deposit, and dozens of other scenarios. Standby Letters of Credit are extremely flexible and widely accepted instruments.

The value of a Standby Letter of Credit is based on the crediting rating of the issuing bank. Ultrimal Investment carries an “A” long term credit rating from Moody’s and is widely accepted throughout the world.

Example Scenario

If you are involved with an import/export transaction involving an open account and 60-day terms, the buyer’s bank may issue a Standby Letter of Credit, allowing the seller to draw if payment is not received within the 60 days. If payment is received, then the Letter of Credit is not acted upon and simply expires.

Standby Letters of Credit are also widely used by exporters selling their products overseas. Many foreign markets require instruments called bid bonds, advance payment guarantees, performance bonds and other similar names. A Standby Letter of Credit can often be used to satisfy the requirements for these documents in your bid documents and sales contracts.

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