Stand-By Credit Letter

Standby credit letters are irrevocable documentary promise to pay, extensively used in international trades where the seller may request a letter of credit ensuring payment if due to any circumstances, the buyer is unable to make a payment to the seller. Standby letters of credit are basically considered as a last resort payment option and it costs up to 8% of the face amount per annum although one has the privilege to cancel it if the terms of contract are met by all the parties involved in the trade.

In the event, the buyer is unable to pay the seller for the goods purchased or services rendered, then the seller being the beneficiary, can demand payment from the bank on behalf of the buyer, irrespective of any disputes between him/her and the buyer. In such a case, the seller is usually asked to present a documentary demand for payment even though such a thing is not mentioned in a standby credit letter. The standby acts as a guarantee for payment to the seller and therefore, bank becomes payable to the seller's demand without any objections. The beneficiary may decide whether he would accept a standby.

There are different types of standby letters based on their functions, which include performance standby, insurance standby, advance payment standby, tender or bid bond standby, counter standby, direct pay standby and commercial standby. A standby transaction involves an applicant, the beneficiary, the issuing bank, an advising bank and the confirming bank.

Below, we have provided a sample standby letter of credit for your reference. Study the layout of the letter and use this letter as an example only rather than copying the content completely.

Wells Fargo Bank
108 Lacey RD
Whiting, NJ
(732) 356-8268

Date of issue: October 17, 2011

Date of expiry: October 16 2013

To

Name and address of the beneficiary

Dear ___________(Beneficiary),

We, Wells Fargo Bank, hereby establish this unconditional, irrevocable standby letter of credit #4800/SC97 in the favor of ______________ (beneficiary), upon request of our client, Anderson Milton Co, for an amount of $24000.

We hereby give you the privilege to demand payment on behalf of Anderson Milton Co, wherein we shall honor your demand without any further enquiry, irrespective of our client's objection, in the event our client fails to make your payment.

You may draw a sum of up to $24000 from our branch in _______________________(location and address of the bank branch) provided you deliver, before the date of expiry of this letter, documental proof on unpaid dues along with a written demand for your payment certifying that you are to use the amount for outstanding dues on our client's part.

This undertaking is to be used for payment and payment in terms of money only and this bank does not commit to perform any of our client's obligations mentioned in the contract or the letter of credit.

The amount of this letter of credit is subject to reduction in which case we shall be sending you a prior notice.

This standby letter of credit will be valid throughout the business period till the date of expiry and you are to inform us prior to the closing of this business to cancel this letter if our client's obligations have been fulfilled; failing to do so will result in additional charges on your part.

The letter of credit is subject to extension automatically, anytime without any amendment for one year from the present or future expiration date unless we choose to notify you 60 days prior to the date of expiry in writing that we do not intend to renew this letter for an additional period.

It is agreed that any drawings under the letter of credit #4800/SC97 will be honored upon presentation of your demand for payment as mentioned above.

_____________________________

Authorized signature

(Name and position of bank authority)

The above example of a standby credit letter should give you an idea of how the letter needs to be drafted.

Also, you can view Credit Report Dispute Letter and Importer Credit Letter for more example of letters.