Benefits of Standby Letter of Credit
A standby letter of credit is mostly used while making international transaction. It is customizable and reduces credit risk and as a result it enables new trade relationships.
Below are some benefits of Standby letter of credit: 1. A standby letter of credit is very helpful in case of transaction with an unknown partner or to establish a new trade relationship. With the help of letter of credit, businesses can grow to new area more quickly and because of this lot of people monetize standby letter credit.
2. Another advantage of standby letter of credit is, it highly customizable. As per their requirement, both of the trading partners can put their terms and conditions and can make mutually exclusive list of clauses. And between the same trading partners the letter of credit can customize from one transaction to another. 3. The amount of credit-worthiness can be transfers from the buyer to the issuing bank with the help of letter of credit. In case the buyer is backed by a larger institution like a bank, then he or she can do more than one transaction at the same time.
4. Even if there are any obligations and disputes arise between the trading partners, the issuing banks stays out of any obligation with the help of letter of credit. In order to pay the full amount, the bank only has to check if the documents submitted by the beneficiary meet with the terms and conditions of the letter of credit. 5. The letter of credit help the seller get their full payment even if the buyer goes bankrupt. When the buyer issued a standby letter of credit, the issuing bank receives the amount of creditworthiness, so the issuing bank need to pay the amount agreed in the letter of credit. So letter of credit secures the payment from the buyer’s business risk.
6. A standby letter of credit is executed very quickly. To receive the full payment, the seller only has to present the proof of material type and quantity and document of shipping which help to support his or her claim of the product being delivered. And once it proved the payment will go to the seller’s bank account instantly. 7. If there are any kinds of dispute between the trading partners, then as they agreed on the terms and condition on the letter of credit, the seller can withdraw the fund and they can resolve the matter in the court later.
8. Letter of credit is more beneficial to the seller compared to the buyer. Since the bank only need the proof of shipping as the terms and condition of the letter of credit.