What is a Standby Letter of Credit?

A Letter of Credit is a promise to pay a specific amount to a named payee upon fulfillment of the requirements laid out in the letter. 

• Read more about how a letter of credit works.

Standby Letters of Credit (SLOC) is issued to stand in as debt repayment guarantee. 

Restated, it is a legal document that guarantees that the creator of the letter will pay the sum agreed upon if the debtor fails to fulfill this obligation to the creditor.

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A Little More on What is a Standby Letters of Credit 

A SLOC may also stands in as a guarantee that a firm or individual is capable of repaying the borrowed money in the eventuality of the firm folding and ceasing operations. 

SLOCs are especially useful in international trade treaties as the risks involved with dealing in large sums are considerably higher, especially in light of diverse national laws. 

Individuals and firms seeking an SLOC will work with a financial institution or bank. Generally, the individual must post as collateral any assets, properties, or shares, as collateral in case of defaulting on the loan. 

Academic Research on Standby Letter of Credit

• The No-Guaranty Rule and the Standby Letter of Credit Controversy, Lord, R. A. (1979). Banking lJ, 96, 46. This paper sheds light on the No Guarantee clause included in SLOCs and the resulting controversies.
• Enjoining the International Standby Letter of Credit: The Iranian Letter of Credit Cases, Getz, H. A. (1980). Harv. Int'l. LJ, 21, 189. This paper sheds light on SLOCs in international trade with Iran. 
• The Standby Letter of Credit Debate-The Case for Congressional Resolution, Katskee, M. R. (1975). Banking LJ, 92, 697. This paper examines the legislative issues influencing the debate on SLOCs.
• The Standby Letter of Credit Debate, Harfield, H. (1977). Banking LJ, 94, 293. This paper presents a critical take on SLOCs and presents theories in favour of as well as against the issue. 
• Third-party certification in new issues of corporate tax-exempt bonds: standby letter of credit and bond rating interaction, Stover, R. D. (1996). Financial Management, 62-70. This paper examines the roles of various institutions involved in the issuance of SLOCs, and their interaction with bonds ratings. 
• Analyzing Bank Drafted Standby Letter of Credit Rules, The International Standby Practice (ISP98), Dolan, J. F. (1999). Wayne L. Rev., 45, 1865. This paper analyses the drafting of SLOCs by banks, the procedure, rules, and practices, in international trade.
• From the Bankruptcy Courts: Release of Standby Letter of Credit as a Defense to a Preference Action, Weintraub, B., & Resnick, A. N. (1988). Uniform Commercial Code Law Journal, 21, 183. This paper examines a legal case around a SLOC and its implications.
• The Standby Letter of Credit: What it is and how to use it, Banks, J. L. (1984). Mont. L. Rev., 45, 71. This paper provides an in-depth explanation of SLOCs, their enforcement, uses, and more. 
• The Domestic Standby Letter of Credit Desk Book for Business Professionals, Bankers and Lawyers, Dolan, J. (2016). This chapter makes the case for a SLOC and its various useful applications in business. 
• The Standby Letter of Credit and the Unsecured or Underliquidated Damages Clause, Browne, A. P. (1988). U. Bridgeport L. Rev., 9, 241. This paper sheds light on the enforceable clauses in a SLOC and provisions included to repay default amounts. 
• Documentary and Security Characteristics of Standby Letter of Credit in International Trade Law, Fallah, M. (2013). Comparative Law Researches, 17(2), 143-166. This paper focuses on the impact of SLOCs in international trade, characteristics, practices, and the legalese surrounding it.
• Standby Letter of Credit is Not a Deposit, Rendell, R. (1986). Int'l Fin. L. Rev., 5, 11. This paper sheds light on the differences between a SLOC and bank deposits.