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.
- The major similarity between the SBLC and LC is that in both the cases the agreement is between the buyer and the seller, though the process in between is different.
- The contract is in good faith and in both the cases the fund gets mobilized.
- International trade is benefited by both the letters however, there are other purposes served by standby letter of credit.
- Standby letter of credit issued by the bank is to vouch for the performance of its customers, who in trading term is the buyer of resources. This is not a single transaction based and can be given to a company that is trying to expand. On the other hand, the letter of credit is for an individual international trade transaction.
- The SBLC assures the return of advance payment to the customers of its clients and as it is issued by the bank or any such institution whereas, the LC is provided to the exporting bank for and they receive the money when any discrepancy is cleared.
- The LC is an irreversible agreement between where the two banks require agreeing on a transaction. Here, there is no chance of ‘may be’ because the deal is signed and confirmed. In case of SBLC, however, the letter of credit is issued in the favor of the borrower and the other party always have chance to agree or disagree to it.
- The LC procedure is more time consuming as there need of documentation are more and verification is done on both sides. However, in case of SBLC the bank issues the letter once it is satisfied with the performance of the company that is requesting for it and it can use the letter for its business purposes.
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.