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In the world of international trade and finance, Letters of Credit (LC) and Standby Letters of Credit (SBLC) are two common instruments used to facilitate transactions and provide financial security to parties involved. While both serve similar purposes, they differ in their structure, application, and the nature of the guarantee they provide. This article aims to provide a comprehensive understanding of the differences between LC and SBLC, including their definitions, uses, and key features.

What is a Letter of Credit (LC)?

A Letter of Credit is a financial instrument issued by a bank on behalf of a buyer (applicant) to guarantee payment to a seller (beneficiary) for goods or services provided. It serves as a contractual agreement between the buyer and seller, with the issuing bank providing a guarantee of payment to the seller upon presentation of compliant documents.

What is a Standby Letter of Credit (SBLC)?

A Standby Letter of Credit is also a financial instrument issued by a bank on behalf of a buyer (applicant) to guarantee payment to a seller (beneficiary). However, unlike an LC, an SBLC is typically used as a secondary payment mechanism, only becoming operational if the buyer fails to fulfil their payment obligations to the seller.

Key Differences between LC and SBLC

1. Primary vs. Secondary Payment Guarantee:
   • LC: In an LC, the bank's obligation to pay is primary, meaning that the bank must honour the payment upon presentation of compliant documents, regardless of the buyer's financial status.
   • SBLC: In an SBLC, the bank's obligation to pay is secondary, meaning that the bank only pays if the buyer defaults on their payment obligations to the seller.
2. Application:
   • LC: LCs are commonly used in international trade to facilitate transactions between buyers and sellers, ensuring that payment is made upon the presentation of compliant documents.
   • SBLC: SBLCs are often used as a form of insurance or backup payment mechanism, providing assurance to the seller that they will receive payment if the buyer fails to pay.
3. Use in Commercial Transactions:
   • LC: LC are used in commercial transactions where the buyer and seller are in different countries and may not have an established relationship.
   • SBLC: SBLCs are used in various situations, including construction projects, real estate transactions, and bid bonds, where there is a need for financial security.
4. Validity and Expiry:
   • LC: LCs have a specific validity period within which the documents must be presented for payment.
   • SBLC: SBLCs typically have a longer validity period and may be valid for several months or even years, depending on the agreement between the parties.
5. Amendment and Cancellation:
   • LC: LCs can be amended or cancelled by the issuing bank with the consent of all parties involved.
   • SBLC: SBLCs are usually irrevocable and cannot be amended or cancelled without the consent of all parties.
6. Cost:
   • LC: The cost of an LC is typically borne by the buyer (applicant) and may include issuance fees, confirmation fees (if applicable), and other charges.
   • SBLC: The cost of an SBLC is also borne by the buyer (applicant) and may vary depending on the terms of the SBLC and the issuing bank.

Conclusion

In conclusion, while both Letter of Credit (LC) and Standby Letter of Credit (SBLC) serve as important financial instruments in international trade and finance, they differ in their structure, application, and the nature of the guarantee they provide. Understanding the differences between LC and SBLC is crucial for businesses and individuals involved in international transactions to effectively manage risks and ensure smooth and secure transactions.

Why Chandra Credit for Getting SBLC or LC?

Chandra Credit Ltd. has been in the business for almost two decades and has come a long way after beginning its journey perhaps in one of the tough and challenging times.  We help our patrons to find perfect solutions for fund requirements with professional excellence. We are dedicated to delivering our best on our job with complete focus and reliability.  Looking for a financial advisor in Noida? We at Chandra Credit Limited offer a wide range of Trade finance services, including trade import finance, project funding and Co-operate finance services.