Standby Letter of Credit

Also found in: Acronyms.

Standby Letter of Credit

Documents evidencing failure of the bank's customer (the applicant) to pay an obligation when due.

Standby letter of credit

Agreement to guarantee invoice payments to a supplier; a standby LOC promises to pay the seller if the buyer fails to pay.

Standby Letter of Credit

A statement issued by a bank to the buyer of a good stating that the seller will receive payment on time and in the correct amount. If the buyer fails to make payment, the bank will do so on his/her behalf. The buyer presents a letter of credit to the seller, which virtually eliminates the risk that the seller will not be paid. Letters of credit have become very common in international commerce, as distance and other factors make it difficult for sellers to establish the creditworthiness of every buyer.

standby letter of credit

Usually shortened to standby or to LOC. It is the agreement by a lender to disburse funds to a third party if the lender's customer defaults on its obligations to that third party (called the beneficiary).

Rather than pay a large security deposit for a lease, a tenant might offer the landlord a standby letter of credit (LOC) issued by the tenant's bank. For all but the most exceptionally credit-worthy customers, the bank will usually require cash collateral in the form of a certificate of deposit or comparable asset.

The issuance fee is generally in the range of 1/2 to 2 percent per year for the issuance of the standby,which should be less than the money earned by the cash collateral.

The LOC will usually specify the exact manner in which the beneficiary must collect funds, such as presentation of the original LOC at a certain branch location to a particular officer at that location, accompanied by a statement regarding the customer's default. Normally, the statement must be worded exactly in the manner specified within the body of the LOC and any paraphrasing at all will result in denial of payment.The LOC will also have a date and time of expiration.

Landlords (or anyone else) accepting standby letters of credit should be aware that the law in this area is very precise in its requirements.In many states,minor errors in wording the documents presented in order to collect on a letter of credit might result in the bank's legally justifiable refusal to pay. Presenting documents to the wrong person, or at the wrong location, could result in refusal to pay.That refusal might not be curable because of the expiration of the time limits within which to make the claim.The better practice is to pay a lawyer with good malpractice insurance to review the documents and prepare the request for payment.

References in periodicals archive ?
Joint Certification Influence of Bank Issuance of Standby Letter of Credit and Associated Credit Rating
Payments of the principal of and premium on the Bonds at maturity or upon redemption or repurchase will have the benefit of an irrevocable standby letter of credit issued by ING Bank N.
The lease was partially secured by a standby letter of credit issued under Quantum's revolving line of credit and a blanket lien on all of Quantum's assets.
Here, Taxpayer's promise to pay vacation benefits was secured by an irrevocable standby letter of credit, and payments made or to be made thereunder were not subject to the claims of its general creditors.
rated 'A-/F1', Stable Outlook), acting through its New York Branch, with a revocable standby letter of credit (liquidity facility) to be provided by Sumitomo Mitsui Banking Corporation (Sumitomo; rated 'A/F1', Stable Outlook), acting through its New York Branch.
The agreement provided the Company with the right to draw down on the $50 million standby letter of credit and the right to bring arbitration proceedings for damages arising from TMI's conduct.
Meanwhile, RAM Ratings notes that the existing plant is viewed to be strategically important to TNB, which has provided a perpetual standby letter of credit that covers the requirements of Manjung Island's Finance Service Reserve Account and a letter of undertaking that covers up to MYR 300 million of construction cost overruns for the new plant.
The amended and restated senior secured credit facilities will consist of a $400 million three year revolving credit facility and a $200 million three year standby letter of credit facility.
13, 1992 (prior to the end of the 2 1/2-month period), the calendar-year taxpayer purchased an irrevocable standby letter of credit to secure its obligation to pay the unpaid vacation benefits accrued during the year ended Dec.
the bank) will enter into an agreement pursuant to which the bank will issue its standby letter of credit with respect to the series 2008B bonds, in substitution of the existing liquidity facility with KBC Bank N.
The Company has as a consequence issued a termination letter to TMI and issued instructions to its bank to draw on the $50 million standby letter of credit to offset the damages that the Company will suffer as a result of the early termination of the off-take agreement.
regulations will be invaluable to any and all non-domestic Seller-side sources regarding our $150M Standby Letter of Credit (SBLC)," said Andrew DeVries, NANNACO, Inc.