What is a standby letter of credit and how is it used?
A standby letter of credit is an obligation of the issuing bank to make payment to the designated beneficiary, contingent on whether the bank’s customer fails to perform as called for under the terms of a contract. The standby letter of credit is issued based on the creditworthiness of the borrower, with an evaluation of credit similar to that for a commercial loan. They are issued by banks for a variety of purposes, including standing behind monetary obligations, insuring the refund of advance payment, supporting performance and bid obligations and insuring the completion of a contract.
