This Standby Letter of Credit (Overdraft) is to be issued by an Issuer for a Beneficiary on request by an Applicant. It works as a guarantee to ensure that payment for a deal is made by means of overdraft. The most common scenario where the Standby Letter of Credit is issued is where two parties enter into an agreement or a deal, and they do not know each other’s credibility well enough. The Bank would then issue this Standby Letter of Credit to act as an assurance for the parties to trust each other. In other words, the Issuing Bank acts as a guarantor for the Applicant in order to obtain a contract by assuring the Applicant’s obligation to the Beneficiary would be fulfilled, through this Standby Letter of Credit. This Letter, in the worst-case, where the Applicant escapes liability, would avail the Beneficiary to claim payment from the Bank. And as the Bank is only obliged to pay only in the worst-case scenario, it is therefore, a “Standby” Letter.
The difference between the general version template and the overdraft version template is that the Bank would help the Applicant make the payment even by means of overdraft, if the overdraft version is used. It offers a greater protection to the interests of the Beneficiary, as it means that disregard of the financial strength of the Applicant, the Beneficiary would be paid, either by the Applicant or by the Bank.
This document should be carefully read by the Bank and the Recipient of the Letter (the Seller).
The Bank and the Recipient should sign and return a copy, and once signed, both parties should get a copy.
All terms and conditions regarding the transaction should be clearly stated in the agreement. The party names shall be clearly stated in the Letter, as well as the maximum amount with the corresponding currency and the payment date. The effective period shall also be specified in the Letter, with both the starting and expiry date entered in the Letter.
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Letter of Credit,
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