Standby Letter of Credit - Explained
What is a Standby Letter of Credit?
Written by J. Mance Gordon
Updated at April 19th, 2024
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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.
How is a Standby Letters of Credit Used?
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.