Standby Letter of Credit

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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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

The Complete Real Estate Encyclopedia by Denise L. Evans, JD & O. William Evans, JD. Copyright © 2007 by The McGraw-Hill Companies, Inc.
References in periodicals archive ?
Payments from SSGC are secured by way of Stand-By Letter of Credit (SBLC), due to which chances of deterioration in the Working capital cycle are very low.
HSBC and Standard Chartered Bank have issued a $500 million Stand-By Letter of Credit by order of Ghana National Petroleum Corporation (GNPC), Ghana's national oil company.
The companys obligation to PSO remains covered by a Stand-by Letter of Credit of Rs 8 billion provided by HUBCO to PSO under the Fuel Supply Agreement.
The ratings are based on the credit enhancement in respect of the term loans by way of either an unconditional and irrevocable guarantee or a Stand-By Letter of Credit given by Societe Generale+ [rated Aa2 (negative) for its long term debt/Prime-1 by Moody's Investor Service] for repayment of the principal, interest and other charges, including legal charges and expenses, payable under the captioned debt programme.
One way to overcome this is to have the buyer post a stand-by letter of credit as further collateral.
They also announced that Singapore will be the first country to sign up for the Stand-By Letter of Credit announced at last year's conference.
Letter of Credit: Demand a stand-by letter of credit instead of a guaranty.
(Examples: a stand-by letter of credit by a major bank may be inserted as security; the lessor can participate as a term lender, also.)