Standby Letter of Credit
From Open Risk Manual
Definition
Standby Letter of Credit. As opposed to a commercial letter of credit, it is a letter of credit that does not cover the direct purchase of merchandize. It is called with the adjective standby since it is often intended to be drawn on only when the applicant for whom it is issued fails to perform an obligation. There is a type of standby letter of credit that is intended to be drawn on, referred to as a direct pay letter of credit. Standby letters of credit are based on the understanding that payment is made against presentation of documents: normally a statement from the vendor indicating that the buyer has not paid for the merchandize/ invoices on the due date.
