Standby Letters of Credit
A standby credit provides a monetary sum to the beneficiary in the event of payment or commercial default by the applicant. It operates like a letter of credit but performs the function of a guarantee. The risk of issuing a standby is considered from the issuer’s and applicant’s perspective. Given their vulnerability to fraud and money laundering due to the potential for lack of transparency and ease of claim, structuring of the terms and claim documentation is discussed to reduce these risks. The types of standby are described with focus on the commercial standby credit. Comparison is made with standard documentary credits and demand guarantees. The use of standby credits to support open account receivables finance and how to structure a funding facility are explained.