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What Is A Standby Letter of Credit and How Are They Used?

Expanding your business and widening its scope might be more difficult than it looks. For, even if you have a complete business plan ready, it takes a lot of investment and financial aid to actually execute those ideas. This is where banks come into the picture introducing new and innovative financial instruments for your benefit. Read on to know more about standby letter of credit cost and its uses in UAE trading;

Bank Standby of Credit

What Are Bank Standby Letters of Credit?

Standby letters of credit are issued by the bank on behalf of the client. It is an agreement that is drawn between the buyer and the seller and usually takes place over international trading and transactions. In this document the bank agrees to act as the guarantor for the client and promise to clear their dues in case of any delays in the bank. In taking liability for the future bad debts of the clients, the bank is also reducing the pressure on the seller. The other party is now reassured of the payment, thereby adding more credibility to the exchange.

Need for Standby Letters of Credit

Standby letters of credit are usually used for export and import trading businesses. Here the bank usually takes the full responsibility for the client’s credit worthiness and even offers to pay on its behalf. However, for a business holding using the standby letters of credit is actually the last resort.

Being unable to clear their debts and payments can be a huge blow to their market reputation among other traders.

Credit Worthiness

Furthermore, banks only provide this facility to business holdings that have established a financial stability in the sector. They need to prove their credit worthiness to the bank. In turn the financial institution lends their expert counseling and goodwill to the brand, thereby boosting its appeal.

The basic purpose of the standby letters of credit is to establish a sense of trust and reliable between the two parties. In international trade, this harmony becomes even more imperative as any hassle can result in political and economic crisis.

A quick look online will give you a list of all the institutions that offer these services to their customers. You can also check out their websites to know more about the facilities and perks offered. It is also recommended that you check the customer reviews and ratings as well as they are a reliable source of information about any platform online.