Investing in Standby Letters Of Credit – What You Should Know

Before investing your hard-earned money into a standby letter of credit, it is important to understand what they are and how they differ from traditional ones. Letters of credit, regardless of whether they are standard or standby, are not uncommon and are used most often for large contracts. Financial institutions issue standard letters for international trade and commercial trade contracts. Almost without exception, standard letters are irrevocable and require all parties to agree on any changes before they can be made. Standard letters are useful in deals that involve high-value or large amounts of money.

A standby letter, on the other hand, is more like an insurance policy for the supplier in a trade agreement or for a deal’s beneficiary. The bank that issues a standby letter agrees to repay any and all funds in the event that the applicant is unable or unwilling to. These types of letters represent a last resort of sorts and can only be used if the applicant has failed to meet all of the payment terms set forth in the contract. Because payment is guaranteed by the issuing bank, standby letters represent relatively low risk investments.

The purpose of a letter of credit is to ensure that the beneficiary receives the money that is due to them for a product or service. The person or entity that is purchasing the services or goods is referred to as the client. The client’s bank is the one that actually issues a letter of this kind. Most letters require the company or person receiving the money, also known as the beneficiary, to produce documents in order to collect payment. This not only makes it easier to keep track of the funds being sent and received, but ensures that proper payment is being made according to the agreement with in the letter.

Most banks are able to issue these letters and any fees that come from one will be applied to the client’s account. Both standby and standard letters are issued as assurances that the individual or company selling services and products will receive the money due to them. Investment in standby letters are not necessarily the most high yield investments an individual can make, but since they are generally fairly low risk they can offer a popular alternative to other investment options.

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