Many people regard standby letters of credit as not being proper documentary credits, which is partly justified they are used in the same way as a bank guarantee but, like commercial credits, are subject to the international rules and any existing legislation pertaining to documentary credits. The main difference between a commercial credit and a standby letter of credit is that a commercial credit is expected to be used according to its purpose, that is to act as a means of channelling documents and payment between the Buyer and the Seller. Like a guarantee, a standby is not supposed to be used, unless the parties fail to perform their obligations: that is why it can be defined as a bank guarantee taking the shape of a documentary credit and being subject to the UCP rules.

1. Stand-by Letter of Credit
29 novembre 2019
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TRADE FINANCE 101
Stand-by Letter of Credit
The “Middle Earth” of Trade Finance
Andrea Frosinini
29/11/2019
Ref. https://www.linkedin.com/feed/update/urn:li:activity:6606140414309212160/
Many people regard standby letters of credit as not being proper documentary credits, which is partly justified
they are used in the same way as a bank guarantee but, like commercial credits, are subject to the international
rules and any existing legislation pertaining to documentary credits. The main difference between a commercial
credit and a standby letter of credit is that a commercial credit is expected to be used according to its purpose,
that is to act as a means of channelling documents and payment between the Buyer and the Seller. Like a
guarantee, a standby is not supposed to be used, unless the parties fail to perform their obligations: that is why it
can be defined as a bank guarantee taking the shape of a documentary credit and being subject to the UCP rules.
It is a relatively old product, whose use has gained ground over the recent years and most bankers simply refer
to it as a “standby”. As with a commercial credit, the standby is issued with the aim of putting the Beneficiary in
the condition to present documents in accordance with the stipulations of the credit in order to obtain payment.
Instead of requiring the presentation of invoices, transport documents and insurance policies , evidencing the
shipment of a specific consignment of goods, the Beneficiary must under a standby present a document declaring
that the Applicant has not fulfilled his obligations, and that the he is therefore entitled to receive payment under
the standby. Quite often the credit stipulates the Beneficiary’s declaration to be accompanied by further
documents supporting the claim, either originals or copies.Like the commercial documentary credit and the bank
guarantee, a standby is a very flexible instrument and can be used for all types of business. It can cover anything
ranging from an ordinary guarantee commitment to sophisticated financial tools.If a payment risk of a single
commercial transaction is to be covered, it is normally recommendable to use a commercial credit, while the
standby would be favoured to secure the payment of a claim in connection with a more permanent business
relationship.Many business people prefer to use a standby, rather than an ordinary guarantee, because the
standby is subject to the ICC Uniform Customs and Practice for Documentary Credits or, since 1st January 1999,
International Standby Practices (ISP98), while the ICC’s Uniform Rules for Demand Guarantees (URDG) has not
yet gained international acceptance to the desired extent, though efforts made by the ICC Banking Commission
seem to take the use of the URDG to a higher level and to do so, since 2006, a working party under the Banking
Commission has been involved in a revision of the URDG. Apart from the wish to achieve financial security in a
business transaction, there may be a need to move the risk and commitment relating to the execution of a judicial
decision from the Beneficiary to the Applicant as the first can generally demand payment under a standby. If the
latter finds that a drawing by the Beneficiary is unjustified, the Applicant shall initiate legal proceedings to obtain
a refund.