Let’s Compare Letters Of Credit With Standby Letters Of Credit

Let’s talk about some of the positives and negatives of the SBLC, commonly known as a Standby Letter of Credit.

Compared to other types of letters of credit, the standby letter of credit can be more beneficial to the trade. The SBLC uses the original documents and bill of lading to obtain payment for merchandise from a seller to a buyer. All this is done in different parts and the process concludes when the merchandise arrives at the port.

Document verification is done in one go, and it is less strict and faster. The documents that the recipient must present are greatly simplified.

In documentary credit, the documentation flow is more complex. The originals must be sent to the bank and subsequently sent for verification to the issuing bank. The latter will deliver them to the payment of the order once another verification process is completed. These operations usually take about ten days. For maritime short circuits (such as those in the Mediterranean), the merchandise arrives at the destination port, in most cases, before the documents. However, an original bill of lading must be presented to the shipping company in order for it to deliver the merchandise.

However, this advantage of Standby Letter of Credit compared to letter of credit only applies if we consider these tools as a means of protection against the risk of default. Let’s not forget that documentary credit is also a means of payment, which is not an SBLC, so it is misleading to compare two tools that do not work in exactly the same way.

One of the disadvantages that we can notice in the Standby Letter of Credit is in terms of the protection it provides to the buyer. Letters of credit generally provide equal protection to the parties involved in the trade. However, the process may be more favorable for one side than the other. According to the International Standby or ISP98 rules, the review process will take from 3 days to a week. The buyer is more at a disadvantage because the period may be too short to review details or typographical errors within the document that can make delivery difficult. Some people compare an SBLC with blank checks to the vendor order.

Standby letters of credit are fairly new to the world of international trade and are therefore legally new as well. The laws that apply to you may be uncertain and not equally applicable compared to other types of letters of credit.

If we balance the advantages and disadvantages of the Standby Letter of Credit, the benefit of having protection against default is the most important.