Standby Letter of credit (SBLC) and documentary letter of credit (DLC) are both financial instruments used worldwide for international trade transactions that provide a payment guarantee, yet with a common aim they serve different purposes and function in distinct ways.
Comprehending the meaning of SBLC and DLC
A standby letter of credit is a guarantee that the bank issues on behalf of the client providing a promise that the payment will be facilitated to the seller if the buyer defaults on the agreement.
The key feature of SBLC is that it is designed to serve as a backup that comes into the pay incase of a non-payment. This sense of payment comfort provides a security to the seller that they will receive the payment in any situation.
Often used in financial transactions that include leasing contracts, loan agreements, performance bonds.
A documentary letter of credit also known as a letter of credit is a payment instrument provided by the bank that issues a promise of payment to the beneficiary on behalf of the buyer upon presentation of certain documents that comply with the terms of the credit agreement. The receivement of the payment by the beneficiary will only be done upon the fulfillment of the terms and conditions of the contract and provides an assurance of payment to the buyer only if the seller meets the contractual obligations. The key feature of DLC is to facilitate the transaction on the presentation of required documents.
Certain documents are necessary to be presented such as bill of lading, commercial invoice, insurance documents.
Mechanisms of operation
SBLC is used when the buyer’s creditworthiness is in question . It operates on the standby principle and is meant to be utilized only in the case of any default or non payment. With sblc it becomes the bank’s obligation to pay the required amount if the applicant defaults. The payment is further initiated only if the beneficiary demands for the payment along with the evidence.
In DLC, the bank does not interfere in the contract between the buyer and the seller and only assists in verifying the documents and its compliance with the terms and conditions of the DLC. It is commonly used in a transaction where the parties have not established a close relation yet and operates from different countriesThis is used in facilitation of exchange of goods and services. It is further beneficial for both the parties as it provides security and reliability ensuring that the payment is not merely on promises but on performance.
Tailored solutions provided by both financial instruments
In SBLC, specific needs can be tailored according to the requirements of the parties involved. It is flexible as the terms and conditions can be customized and negotiated to suit the transaction. It gives the importer more flexibility and control over the cash flow and payment terms. Certain last minute changes such as to extend the validity or amount, is one of the reasons why sblc is more flexible than dlc.
However, dlc holds document requirements and structure that is much more rigid than sblc. This nature ensures that all the parties adhere to the terms and conditions of the contract. An in-depth attention to detail and understanding of the documentary requirements is needed to avoid any delays, disputes or non-payment.
Unlock global potential with yield 4 finance
At yield 4 finance, we understand the intricacies that lurk in the world of international finance and the vital role of financial trade instruments in securing your transactions. With our robust bank instruments we offer trade finance services like Standby Letter of Credit, Documentary Letter of Credit, Bank Guarantee, RWA, POF.
Through our finance trade services, enhance your trade capabilities and mitigate the risk associated with international transactions. Maintain a steady cash cycle by ensuring timely payments and elevate your business growth. Leverage our team’s expertise and get tailored solutions to meet your business needs.
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