A Step-by-Step Guide to Standby Letters of Credit

Standby Letters of Credit

The global rules that govern the Standby Letter of Credit (SBLC) – both the Uniform Customs and Practice Current Revision 600 (UCP 600) and the International Standby Practice Current Revision (ISP98) – define an SBLC as “Undertaking”. An Undertaking name guarantees the beneficiary of the Undertaking “independent” payment from the issuer (issuers are mostly banks).

Standby Letter of Credit


oUndertaking obligations are complementary to the issuer’s client (in SBLC terminology, the client is usually referred to as the applicant) and the client’s contract adversary (in SBLC terminology, the adversary is known as the beneficiary).


An SBLC is also a credit enhancement tool when the issuer has a higher credit rating. The ability of an applicant to obtain an SBLC from an issuer demonstrates good faith because the SBLC supports an applicant’s credit quality.


In most cases, and depending on the type of SBLC issued, a beneficiary is only authorized to claim payment from an issuer if the applicant is unable to successfully conclude the underlying contract.


Unless otherwise specified in an SBLC, standby letters of credit are considered “irrevocable,” which means they cannot be changed or canceled prior to their stated expiry date without the agreement of all parties.


SBLC Varieties


Bid or tender bond

Supports the bid of an issuer’s client for a project or contract mandate. This type of SBLC guarantees the beneficiary that.




Supports an applicant’s payment obligations to pay for goods or services on a one-time or ongoing basis in the event that other methods of payment are not met.




An SBLC generally requires only the presentation of a draft or bill of exchange, with no supporting statements required. 




Direct Pay LCs are hybrid SBLCs that are issued to supplement the credit of a bond offering. For example, an industrial revenue bond, also known as variable-rate demand bonds. 

How SBLCs commonly used?


Banks that adhere to BASEL or Dodd-Frank regulations will classify their issued or confirmed SBLCs as supporting either a “financial” or a “performance” obligation. These two classifications are as follows:


  1. “Financial” 
  2. “Performance” 

Why are SBLCs becoming more popular in the United States?


Banks in the United States have traditionally lacked the corporate authority to issue certain types of guarantees, but they have always been able to issue letters of credit (LC).


When using SBLCs, be aware of the risks and considerations


Issuer considerations:


Because the issuer is assisting its applicant, it must take into account the applicant’s credit rating.


Applicant considerations:


Standby Letter of Credit transactions has a cost associated with them. An SBLC does not include an applicant as a party. The applicant is a party to a contract, but the issuer of the standby letter of credit is not.

If an SBLC is issued, all parties must agree to any amendment or cancellation request, unless the SBLC has expired.


Beneficiary considerations:


A beneficiary must determine the issuer’s credit rating. A beneficiary may require an acceptable confirming bank if the issuer’s credit rating, size, or country risks are unacceptable to the beneficiary.

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