standby letter of credit (SBLC)

Also called a standby credit, it is an instrument typically issued by a bank which undertakes to pay one party to a contract (the beneficiary) when the other party has failed, or is alleged to have failed, to perform the contract. The beneficiary is usually the purchaser of goods or services under the contract. A standby letter of credit is often payable simply on the beneficiary’s presentation of a written demand.

The issuer’s undertaking to pay creates a primary obligation on it, which is independent of the underlying contract. A standby letter of credit is therefore similar to an on demand bond but differs from a true guarantee (that is, a contract of suretyship).

Indeed, a true guarantee is the obligation of a guarantor to make payment under a true guarantee, it is a secondary obligation dependent on the beneficiary establishing that the primary obligor is in breach of the underlying contract.