Pros And Cons Of Standby Letter of Credit

Here we will talk about the advantages and disadvantages of letters of credit stand-by or Standby Letter of Credit.

On the circuit plan documents, Standby Letter of Credit improves operations very significantly compared to the documentary credit. With a SBLC, the original documents, and in particular the transport of documents such as bill of lading, are sent directly from the exporter to the importer. This allows the operation upon arrival of goods.

The documents are verified upon arrival of the goods and the process it usually fast and less strict. The beneficiary is ready to produce the documents required.

For other type of credit documentation, Letter of Credit and so on, the document flow is more complicated. The reason is that Letter of Credit have more participants in the process and there is information running from an advisory bank to an issuing bank. The verification process for this type of document usually takes ten days. If the merchandise arrives by boat, sometimes the documents arrive later. Additionally in order for the shipping company to transport the merchandise, a bill of lading has to be issued.

It is easy to confuse the functions of Standby Letter of Credit with those of regular letters of credit. For one, some people tend to forget that though Letter of Credit can be used as form of payment, SBLC cannot. However, both letters of credits can be used as a way to protect the holder on non payment. Both tools are different in that sense and that is why they should not be compared.

One of the disadvantages that we can note on Standby Letter of Credit is in terms of the protection it provides to the buyer. Letters of credit are generally providing equal protection to the parts involved in the trade. However, the process may be more favorable to one side more than to the other. According to the International Standby rules or ISP98 the revision process will take from 3 days up to a week. The buyer is more at a disadvantage because the period may be too short to review details or typos within the document that may hinder delivery. Some people compare a SBLC to blank checks to the order to seller.

Standby Letter of Credit are fairly new to the world of international trade, and therefore it is also legally new. The legislations that apply to it may be uncertain and not equally applicable when in comparison to other types of letters of credit.

Weighing the positive and negative aspects of Standby Letter of Credit, we can say that the protection against non-payment is one of the most attractive features of this letters of credit.