What is a Standby Letter of Credit (SLOC)? A Complete Guide to Learn

May 21, 2022 By Triston Martin


What is a Standby Letter of Credit (SLOC)? A SLOC is an official document in which banks guarantee that they will pay a specified amount to a seller in the case that the buyer does not adhere to the contract. A SLOC serves as a security cover for the cost of a physical shipment of items or services that have been completed to the seller in case an unexpected event hinders the buyer from making the required payments to the vendor. In such a situation, the SLOC assures that the charges are paid to the seller to fulfill the obligations.

When establishing a SLOC, the bank that is buying it is required to determine the creditworthiness of the prospective buyer. After the buyer's bank has been confident that the buyer has good standing regarding credit, the bank then sends an email to the seller's bank, confirming its promise to pay the seller in case the buyer fails to honor the contract. It also provides evidence of the buyer's capacity to pay the seller.

What is the SLOC?

A standby credit letter is a legal document that outlines the bank's promise to pay the seller should the buyer or the bank's client fail to fulfill the contract. A standby credit letter aids in global trade between businesses that do not know each other and may have different regulations and laws. Although the buyer is guaranteed to receive the item, while the seller can be sure to get paid, a SLOC cannot guarantee that the purchaser will be satisfied with the product. A standby credit letter may also be abbreviated to SLOC. When we speak of SLOC, it is an agreement to pay that was originally a standard law system but is commonly used in all states.

SLOC is a distinct type of credit for documentary purposes, which is simpler and has all the features. However, it can be used as a type of guarantee contract. From the standpoint of the Italian legal system, SLOC falls within the category of an atypical guarantee. Since the instruments are atypical, they have a lot in common with other Italian organizations, but they cannot be identified or compared to any traditional institutions. SLOC is typically used in global trade, particularly in international supply contracts that ship items by air. The documents and the goods are delivered together, so there is no requirement to keep things in storage while waiting for the papers.

The Advantages of SLOC

A SLOC will ensure that the purchaser will receive the items or services specified in the contract. For instance, if the agreement stipulates the building of a structure and the builder cannot finish the work, the customer will present a SLOC to the lender to be paid in full. A further benefit is that buyers have greater assurance when participating in international trade that the items will be delivered to the vendor. Small businesses may be unable to compete with larger and more well-known competitors.

A SLOC can help boost the project's bid and is often a way to avoid making an upfront payment to the vendor. The SLOC is typically used in contracts that deal with international trade that usually require significant cash commitments and can also carry dangers. If a business is offered the SLOC, the most crucial benefit is the possibility of escape from the worst-case scenario. If the contract requires the payment to be made within 30 days of delivery, but the payment has not been completed, the seller is able to offer the SLOC to the buyer to make payment. The seller is assured of being paid. Another benefit of the seller's SLOC is that it lowers the possibility of the order for production being altered or canceled in the hands of the purchaser.

Final Words

A SLOC can be used to ensure that the buyer receives the items or services as specified in the contract. For instance, if a contract requires the construction of a structure and the builder is unable to complete the project, the buyer will present a SLOC at the time of the loan to the institution so that the buyer can pay it in full. Another benefit of being an involved buyer in global trade is that buyers have greater confidence that the supplier will supply the products.

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