Business transactions usually come along with some challenges. Handling the risks is very important for fair trading. One of the most important challenges is trust worthiness. When two unknown people get into trading, the lack of trust between the concerned parties is the major challenge which must be handled properly to ensure safe trading. This situation arises especially when one involves international transactions. Buyers on another side might be afraid of paying for the goods in advance thinking about the risks involved in the supply of goods.
The standby letter of credit is a popular solution to this problem. It refers to the legal binding of the agreement which is made between the buyer and the seller as a guarantee for the payment and the goods delivery. The issuer of this SBLC is the bank or any other financial institution which provides this document based on the request from its client. This guarantee will be provided by the financial institution only after the proper verification. Understanding the use of standby letter of credit: Usually during the international trading for the security for cash and goods financial instruments are widely used. They allow the trust within the trade such as the ability to re-pay the amount involved in the process and the quality of the goods. This guarantee for the payment issued by the bank can be used at the worst-case when the buyer couldn’t pay the amount. It also acts as the guarantee for the buyer with the quality and quantity of the goods received. The standby letter of credit provides a time period within which the payment must be made. The time period may vary based on the requirement. If the buyer didn’t pay the amount on time, then the seller can use the SBLC to get the amount involved in this transaction. Most of the time, this guarantee is not used since most of the buyers will pay the amount properly on time. The common advantages of using the letter of credit are:
Generally, the applicant/client, beneficiary, issuer and the advising bank are the parties involved in the issuance of the letter of credit. The applicant is the buyer or the client of the bank who makes the payment. The beneficiary is the seller who sells the goods or services and expects the payment. The issuer is the financial institution which issues the letter of credit and acts as the backbone for the smooth completion of the transaction. The advising bank is the beneficiary’s bank that will receive the payment on
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