Business expansion is a process of expanding the business through new acquisition, new customers, and new scope of production and new location of work. The expansion is often quite costly and the requirement of money is huge. With many of the company operating on credit with their suppliers and lenders, it can be difficult to accumulate money for the new expansion. That is when the standby letter of credit, issued by bank becomes worthy. It is a document that assures the lender, suppliers or the beneficiaries about the credibility of the company to pay the due in good faith.
Letter of credit is issued by bank directly to the supplier in order to enable it to withdraw money from the bank in the exporting location. This is an irreversible commitment that the importer bank provides to the seller against which the seller can extend its credit line and mobilize the merchandise and business transaction. This is actually a note of deferred payment where two banks need to come to a point of agreement.
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Differences
There are times when companies try to expand and they require funding for the same. In many cases the company requires to surrender the equity to get more funds from the market. Most of the companies that are confident about its performance will not like to do that and in such cases SBLC come up as a savior. However, it should be always remembered, that the payment of the credit is just deferred but has to be paid by the company within the agreed time. It is a crucial financial decision by the company and should be taken only after considering its abilities.
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