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Standby Letter of Credit

Overdraft

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, to guarantee the Beneficiary to be paid, either by the Applicant or by the Bank.

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Document Description

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 an overdraft, to guarantee the Beneficiary to be paid, either by the Applicant or by the Bank.

In general, the most common scenario for a Standby Letter of Credit to be 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 a Standby Letter of Credit, which acts 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 Letter of Credit Standby / Trade Letter of Credit. 

The letter of credit, in the worst-case scenario where the Applicant escapes liability, would enable the Beneficiary to claim payment from the Bank. As the Bank is only obliged to pay only in the worst-case scenario, it is, therefore, only a “Standby” Letter. 

A Standby Letter of Credit is particularly important in international trading, where it would be even more difficult for companies to know each other’s credibility well, and the different laws and regulations that they are bound to.

A Standby Letter of Credit could firstly, help both parties gain trust, with the Issuing Bank involved as a guarantor; and secondly, set the responsible jurisdiction and governing laws, so as to prevent any disputes regarding the relevant laws.

The difference between the general template and the overdraft template is that the Bank would help the Applicant make the payment even by means of an overdraft if the overdraft version is used. It, therefore, offers greater protection to the interests of the Beneficiary, as it means that disregarding the financial strength of the Applicant, the Beneficiary would be paid, either by the Applicant or by the Bank.

How to use this Document? 

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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