Let’s talk about some of the positive and negative aspects of the SBLC, commonly known as a Standby Letter of Credit.
Compared to other types of letters of credit, the standby letter of credit can be more beneficial to the business. The SBLC uses the original documents and bill of lading to obtain payment for merchandise from a seller to a buyer. All this is done in different parts and the process ends when the merchandise arrives at the port.
Document verification is done in one go, and is less stringent and faster. The documents to be presented by the recipient are very simplified.
In documentary credit, the documentation flow is more complex. The originals must be presented to the bank and subsequently sent for verification to the issuing bank. The latter will deliver them to the payer of the order upon completing another verification process. These operations usually last about ten days. In maritime short circuits (such as those in the Mediterranean), the merchandise arrives at the port of destination, in most cases, before the documents. However, an original bill of lading must be presented to the shipping company in order for them to deliver the merchandise.
However, this advantage of the Standby Letter of Credit over documentary credit only applies if we consider these tools as a means of protection against the risk of non-payment. Let’s not forget that documentary credit is also a means of payment, which SBLC is not, so it is misleading to compare two tools that do not work exactly the same way.
One of the disadvantages that we can note in the Standby Letter of Credit is in terms of the protection it provides to the buyer. Letters of credit generally provide the same protection to the parties involved in the trade. However, the process may be more favorable to one side than the other. According to International Standby or ISP98 rules, the review process will take from 3 days to a week. The buyer is further disadvantaged because the period may be too short to review details or typographical errors in the document may make delivery difficult. Some people equate a blank check SBLC with the vendor’s warrant.
The standby letter of credit is quite new to the world of international trade and is therefore also legally new. The laws that apply to you may be uncertain and not equally applicable compared to other types of letters of credit.
When we weigh the advantages and disadvantages of the Standby letter of credit, the benefit of having protection against non-payment is the most important.