Stand by letter of Credit

A standby letter of credit is a document issued by a bank. This document serves as a guarantee: the bank promises to pay a “beneficiary” if something fails to happen.It is important to note that standby letters of credit apply only whenever the issuing bank’s commitment to pay is not contingent on the existence, validity and enforce ability of its customer’s obligation; this is called an “abstract” guarantee; that is, the bank’s obligation is to pay regardless of any disputes between its customer and the beneficiary. The standby basically fulfills the same purpose as a bank guarantee: it is payable upon first demand and without objections or defenses on the basis of the underlying transaction between the applicant and the beneficiary.



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