What is the difference of a standy letter of credit from a documentary letter of credit?


A standby letter of credit is a letter of credit that is issued in favor of the standby letter of credit beneficiary for the purpose of “backing-up” certain specified obligations of the standby letter of credit applicant. A standby letter of credit requires the beneficiary’s presentation of documents which indicate that the letter of credit applicant has not met the obligations which the standby letter of credit backs-up. A standby letter of credit, therefore, is not intended to be drawn upon by the standby letter of credit beneficiary unless the standby letter of credit applicant does not meet its obligations as specified by the standby letter of credit.

A documentary letter of credit (also known as a commercial letter of credit or a merchandise letter of credit) is a letter of credit that is issued for the purpose of making payment to a specified beneficiary if the beneficiary performs as required. Documentary letters of credit are called documentary letters of credit because the banks involved in the letter of credit transaction deal in documents as opposed to goods. The terms and conditions specified in a documentary letter of credit generally involve the presentation of specific documents within a stated period of time.

The principal difference between a standby letter of credit and a documentary letter of credit is the fact that a documentary is an active payment instrument under which payment is intended if the terms and conditions prescribed by the letter of credit are met, whereas a standby letter of credit is a passive payment instrument under which payment is not intended and will occur only if the standby letter of credit applicant fails to meet its obligations as specified by the standby letter of credit.

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