Standby Letter of Credit Template

How to Write a Standby Letter of Credit?

Follow these steps to compose a Standby Letter of Credit:

1. Use a bank letterhead to make a formal document. There is no uniform Standby Letter of Credit format, but the document should look official and contain the heading, the main part, and the final part.
2. Write down the bank details - name, address, and telephone. Add the name and title of the individual responsible for handling this particular letter if necessary.
3. Confirm you are issuing a Standby Letter of Credit and enter its number for your records.
4. Identify the parties of the agreement - the buyer ("Applicant") and the seller ("Beneficiary").
5. Guarantee payment of a certain amount to the beneficiary in case their counterpart fails to perform their duties under the original agreement.
6. State the expiration date of the credit offer.
7. Indicate which party bears the Standby Letter of Credit costs - usually, it is the applicant, unless the parties agree on a different arrangement.
8. Sign the document and obtain signatures of the two parties to the transaction that certify they have read and understood the terms and provisions of the credit.

You are free to add other provisions such as an automatic extension clause or reference to laws and regulations that govern this letter and similar documentation.

How Does a Standby Letter of Credit Work?

A Standby Letter of Credit is the last resort guarantee that minimizes risks for the parties - if the company goes into insolvency or ceases its activity, then the bank steps in and makes necessary payments. Often used in international trade where organizations do not know each other yet have to engage in large financial operations, this document gives confidence to counterparts since the third party makes an official commitment to make a payment to a seller.

There are two different types of Standby Letter of Credit:

• Financial Commitment. The financial institution pledges to deliver payment for services and goods listed in the original contract between the parties. For instance, an international importer of natural resources obtains this letter to show their foreign counterpart they are willing to pay for a huge amount of natural gas and guarantee this payment with a bank commitment;
• Performance Guarantee. This type of credit is less common - a guarantee of this kind confirms that the financial institution will provide compensation to the non-breaching party in case their client cannot complete the project promised by the original agreement.

Check out these related letter templates:

• Letter of Credit;
• Credit Dispute Letter;
• Credit Denial Letter.