Pls advice tht "is SBLC is not safe mode of payment as i hv experienced in my office tht no one ready to work on SBLC. They said SBLC means tht buyer's financial position is nt strong,
A standby documentary credit can be a safe mode of payment, but it is different from a commercial documentary credit. There are a few difference between the two, but the main way to distinguish the two types of documentary credits is their purpose.
For a commercial documentary credit, the main purpose is that the documentary credit will be the mechanism of payment. You are probably familiar with this method as a commercial documentary credit would cover the delivery of a specifice good or service.
A standby doucmentary credit on the other hand has a different purpose. The purpose of the standby documentary credit is not to be utilized on a regular basis. It acts more of an insurance policy rather than the main means of payment. Let me give an example to explain.
An exporter is selling goods to an importer on a regular basis. The exporter is not comfortable with the credit risk of the importer to ship on an open account basis, but the exporter does not want to incur the cost of multiple commercial documentary credits.
In order to be protected, the exporter asks that the importer have the importer's bank issue a standby documentary credit where the exporter is paid in the event that the importer does not pay for the goods. The standby docmentary credit would be issued for a value that would be acceptable to the exporter. The standby documentary credit would require documents such as an invoice marked unpaid, a statement saying that the invoice is past due and a copy of the transport document.
Once the standby documentary credit is in place, the exporter then would ship goods to the importer and bill the importer directly as if the shipment was on an open account basis. The importer would pay the exporter as per their agreement, for example net 30. If the importer fails to pay, the exporter then approaches the bank to draw on the standby documentary credit.
The only issues for the exporter in this case are:
1. Is the credit risk of the issuing bank acceptable.
2. Making sure that the exporter does not have more exposure to the importer than the value of the standby documentary credit.
3. Making sure that they can present the required documents of the standby documentary credit.
So to answer your question, a standby documentary credit can be a safe mode of payment, but the payment and the management of risk is handled differently from a commercial documentary credit.
Standby documentary credit
Hi Imran,
A standby documentary credit can be a safe mode of payment, but it is different from a commercial documentary credit. There are a few difference between the two, but the main way to distinguish the two types of documentary credits is their purpose.
For a commercial documentary credit, the main purpose is that the documentary credit will be the mechanism of payment. You are probably familiar with this method as a commercial documentary credit would cover the delivery of a specifice good or service.
A standby doucmentary credit on the other hand has a different purpose. The purpose of the standby documentary credit is not to be utilized on a regular basis. It acts more of an insurance policy rather than the main means of payment. Let me give an example to explain.
An exporter is selling goods to an importer on a regular basis. The exporter is not comfortable with the credit risk of the importer to ship on an open account basis, but the exporter does not want to incur the cost of multiple commercial documentary credits.
In order to be protected, the exporter asks that the importer have the importer's bank issue a standby documentary credit where the exporter is paid in the event that the importer does not pay for the goods. The standby docmentary credit would be issued for a value that would be acceptable to the exporter. The standby documentary credit would require documents such as an invoice marked unpaid, a statement saying that the invoice is past due and a copy of the transport document.
Once the standby documentary credit is in place, the exporter then would ship goods to the importer and bill the importer directly as if the shipment was on an open account basis. The importer would pay the exporter as per their agreement, for example net 30. If the importer fails to pay, the exporter then approaches the bank to draw on the standby documentary credit.
The only issues for the exporter in this case are:
1. Is the credit risk of the issuing bank acceptable.
2. Making sure that the exporter does not have more exposure to the importer than the value of the standby documentary credit.
3. Making sure that they can present the required documents of the standby documentary credit.
So to answer your question, a standby documentary credit can be a safe mode of payment, but the payment and the management of risk is handled differently from a commercial documentary credit.
I hope this helps you out.
Best regards,
LC Sam
thanks
thanks