Parties and roles
- Applicant
- Issuer — normally a bank or regulated institution
- Beneficiary
- Confirming bank, where used
Trade Finance
Standby letters of credit
An instrument meant not to be drawn on. A standby letter of credit is a documentary undertaking that becomes operative on non-performance of an underlying obligation. In normal course it expires unused: it exists as assurance, and a drawing signals that something in the underlying relationship has failed.
Where it is typically used
Recurring situations, not recommendations: which instrument suits a transaction depends on the contract, the parties, and who has to accept it.
- Long-running supply agreements where payment is expected to run normally and cover is wanted only for failure.
- Contracts that require security without the administrative weight of a documentary credit on every shipment.
- Counterparties that prefer a documentary form to a demand guarantee, or whose jurisdiction favours it.
Applicable framework
Where incorporated, either ISP98 (International Standby Practices) or UCP 600 applies. The choice is made expressly in the instrument and is not interchangeable: the two rulesets differ on examination periods and on several formal requirements.
Support undertaking
Documentary lifecycle
The stages form a sequence: each presupposes completion of the one before it.
- 01
Support requirement identified in the underlying contract
- 02
Selection of ruleset and wording
- 03
Application and credit assessment
- 04
Issuance and advising
- 05
Dormant period — the expected state
- 06
Demand on non-performance, if it occurs
- 07
Expiry
Points of attention
Elements that, in practice, determine how the instrument behaves.
Ruleset left unstated, creating ambiguity on examination standards
Demand conditions drafted so loosely that the instrument reads as payable on request
Automatic extension clauses not tracked to expiry
Treating a standby as equivalent to a documentary credit in a payment role
Typical documents
Which documents an instrument of this kind normally involves. What a given transaction actually requires is set by the text of the instrument.
- Written demand — in the form the standby prescribes, and within its validity.
- Statement of default — asserting that the applicant has not performed the underlying obligation.
- Copy of the unpaid invoice or of the underlying claim, where the text requires it.
- Any certificate the standby names, such as verification of the signatory’s authority.
Frequently asked questions
- What is a standby letter of credit?
- A documentary undertaking that becomes operative only on default. It is written so that a demand is made against a statement of non-performance rather than against shipping documents, and in a transaction that runs normally it is never drawn on.
- What is the difference between a standby letter of credit and a bank guarantee?
- Both cover non-performance. The standby is documentary in form and usually sits under ISP98 or UCP 600, while a demand guarantee is more often governed by URDG 758. The practical difference lies in the documents a demand requires and in the rules the text incorporates.
- Is a standby subject to ISP98 or to UCP 600?
- Either, depending on what the instrument says. ISP98 was written for standbys and addresses their mechanics directly; UCP 600 was written for commercial credits and is sometimes applied to standbys. What governs is the ruleset the text names.
Nova assists with wording review and documentary coordination. The instrument is issued by the institution, not by Nova.
This page is informational and describes the general function of the instrument. It does not constitute legal, financial or tax advice, nor an offer. Each transaction is subject to its own review, documentation and approval.