LC vs SBLC
Gone are the times when business was conducted on good faith. With more and more cases of default on payments coming to light, it has become common practice for suppliers of goods and services to ask their clients (buyers) to arrange for Letter of Credit from their banks to be sure of timely and correct payment. There are many types of LC of which SBLC is very common. Many people are confused as they do not know the difference between an LC and a SBLC. This article will clarify the differences between these two financial instruments meant to safeguard the interests of sellers or supplier to their buyers that may belong to different countries.
Letter of Credit
A Letter of Credit is a type of guarantee for a seller that he will receive timely and correct payments from his clients. This is a financial instrument that has become very popular in international trade in modern times. Because of many uncertainties in cross border trade, particularly as buyers are not known personally to suppliers, letter of credit is a comfortable cover and an assurance to the supplier that he will not suffer any losses or damages because of non payment or default on the part of the buyer. The issuing bank initiates transfer of funds to the supplier once certain conditions mentioned in the contract are fulfilled. However, the bank also safeguards the interest of the buyer by not paying the supplier until it receives a confirmation from the supplier that the goods have been shipped.
There are mainly two types of LC being used these days namely Documentary Letter of Credit and Standby Letter of Credit. While DLC is dependent on the performance by the supplier, the Standby Letter of Credit comes into effect when there is non performance or default on the part of the buyer. DLC comes into play with the expectation that the supplier will fulfill his part of the obligation. On the other hand, there is an expectation that SBLC will not be drawn on by the beneficiary.
SBLC are very flexible financial instruments also referred to as sui generis. They are very versatile and can be used with modifications to suit the interests and requirements of the buyers and sellers. The essence of SBLC is that the issuing bank will perform in the case of non performance by the buyer or when he defaults. This is an assurance to the supplier in situations when he does not know the buyer personally or there has not been previous experience of trade with him. However, the beneficiary (supplier) needs to give proof or evidence of non performance by the buyer to obtain payment through SBLC. This evidence is in the form of a letter strictly according to the language of the contract and satisfying to the bank.
Difference Between LC and SBLC
• Letter of Credit is a financial instrument that ensures timely and correct payments to suppliers from their international buyers
• SBLC is a type of LC that is contingent upon non performance or default by the buyer and is available to the beneficiary (supplier) when he proves this non performance of the buyer to the issuing bank.