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Letter of Credit Vs. Stand-by Letter of Credit: The Differences

Kassandra Bureau
Commodity Risk Assessor


The Importance of Trade Finance Tools in International Commodity Trading 

The complex world of international commodity trading requires secure, efficient, and reliable transaction methods. This is where trade finance tools, including Letters of Credit (LCs) and Stand-by Letters of Credit (SBLCs), come into play. These instruments provide a crucial bridge between buyers and sellers in different countries, reducing trade risks and facilitating smooth transactions, which is why it’s important to know the difference between a stand-by letter of credit and a letter of credit.

Trade finance tools, like LCs and SBLCs, are essentially guarantees provided by banks on behalf of the traders, ensuring that payments will be made if specified conditions are met. They instill confidence in the transaction, enable sellers to manage payment risk and assist buyers in structuring their financial commitments. These tools are vital in the international commodity trading sector, where deals often involve significant financial outlays, long-distance shipping, and varying legal regulations across borders.

Understanding Letters of Credit 

Definition and Role of a Letter of Credit in Commodity Trading 

A Letter of Credit (LC) is a legal document issued by a bank or financial institution guaranteeing that a buyer’s payment to a seller will be received on time and for the correct amount. The bank covers the full or remaining purchase amount if the buyer cannot fulfill the payment obligation. In international commodity trading, LCs are crucial in reducing non-payment risk, thereby encouraging smooth and secure business transactions across borders.

Types of Letters of Credit and Their Functions 

There are several types of LCs, each serving a unique purpose. A commercial LC, for instance, is a direct payment method in which the issuing bank pays the beneficiary. A deferred payment LC allows payment to be made later, and a revolving LC covers multiple transactions within a certain period. Choosing the right LC depends on the nature of the transaction and the relationship between the buyer and the seller.

Deep Dive into Stand-by Letters of Credit 

Definition and Role of Stand-by Letters of Credit in Commodity Trading 

A Stand-by Letter of Credit (SBLC) is a financial instrument used primarily as a backup plan. Under UCP 600, SBLC serves as a safety net, providing payment assurance if the buyer fails to fulfill a contractual obligation. Unlike a traditional Letter of Credit, where the bank pays the beneficiary upon completing certain conditions, the buyer invokes an SBLC only in cases of non-performance or default. In commodity trading, SBLCs are a powerful tool for mitigating the risks associated with international transactions, particularly in volatile markets.

Typical Uses of Stand-by Letters of Credit in the Commodity Sector 

In the commodity sector, SBLCs often back up contracts where the payment obligation is not expected to be invoked unless a default occurs. They may be used to secure financial obligations, ensure the completion of a project, or guarantee the repayment of loans. Additionally, in long-term contracts, an advising bank’s letter of credit often uses an SBLC to guarantee the buyer’s obligation to purchase a specified quantity of goods over a certain period.

The Differences Between Stand-by Letters of Credit and Letters of Credit 

The Different Purposes They Serve 

While both Stand-by Letters of Credit (SBLCs) and Regular Letters of Credit (LCs) serve as guarantees for payment, they have different primary purposes. LCs are designed to facilitate trade, acting as a payment mechanism where the bank pays once specific documents are presented. On the other hand, SBLCs act as a safety net and are invoked only if the buyer fails to fulfill the contractual obligation. An SBLC is a guarantee, while an LC is a payment method.

Variation in Risk Coverage 

The risk coverage also varies between LCs and SBLCs. LCs primarily protect the seller against non-payment risk, while SBLCs safeguard both parties. The seller is protected from non-payment, and the buyer is assured of contract fulfillment. If a contract is not fulfilled, the SBLC can be drawn.

Differences in Terms and Conditions 

LCs and SBLCs differ in their terms and conditions as well. LCs require presenting specific documents for payment, such as a bill of lading or an invoice. SBLCs, however, are invoked upon proof of non-performance or default, requiring a statement or document proving the buyer’s failure to meet the contractual obligations. While offering security in international commodity trading, each tool comes with its unique set of rules and requirements.

Role of Agro Maritime Commodities in Navigating Letters of Credit 

How Agro Maritime Commodities Simplifies LC and SBLC Transactions 

Agro Maritime Commodities understands the complexities of navigating Letters of Credit (LCs) and Stand-by Letters of Credit (SBLCs) in international commodity trading. The company takes pride in simplifying these transactions for its clients, ensuring a seamless process.

Agro Maritime Commodities offers expertise in LC and SBLC transactions, guiding clients through the intricacies of the documentation, compliance requirements, and terms of the financial instruments. The company’s experienced professionals work closely with clients to ensure all necessary documents are correctly prepared and submitted, minimizing the risk of discrepancies that could delay or hinder payment.

Commitment to Ensuring Smooth Trade Finance Operations 

Agro Maritime Commodities is committed to ensuring smooth trade finance operations for its clients. The company recognizes the importance of compliance with the rules and regulations set forth by the International Chamber of Commerce (ICC) and the Uniform Customs and Practice for Documentary Credits (UCP 600).

With a thorough understanding of these rules and regulations, Agro Maritime Commodities provides comprehensive guidance to clients, ensuring compliance throughout the process. The company stays up-to-date with industry developments and best practices to provide clients with the most efficient and effective trade finance solutions.

Agro Maritime Commodities’ dedication to ensuring smooth trade finance operations enables clients to focus on their core business activities while having the confidence that their LC and SBLC transactions are handled professionally and in line with industry standards.


Choosing the Right Tool: SBLC or LC for Your Commodity Trade Needs 

When it comes to international commodity trading, choosing the right trade finance tool is crucial. Consider your specific requirements and circumstances to determine whether a Stand-by Letter of Credit (SBLC) or a regular Letter of Credit (LC) suits your commodity trade needs. Evaluate factors such as the nature of the transaction, risk coverage, and payment obligations to make an informed decision.

Agro Maritime Commodities: Your Trusted Partner in International Commodity Trading 

Agro Maritime Commodities is a trusted partner in international commodity trading, offering expertise, reliability, and a deep understanding of trade finance tools. With a commitment to compliance, efficiency, and client satisfaction, Agro Maritime Commodities simplifies the complexities of Letters of Credit (LCs) and Stand-by Letters of Credit (SBLCs).

Whether you require guidance on LC or SBLC transactions, Agro Maritime Commodities provides comprehensive support to ensure smooth trade finance operations. By leveraging their industry knowledge and experience, Agro Maritime Commodities assists clients in navigating the intricacies of international commodity trading.

When it comes to international commodity trade, partnering with Agro Maritime Commodities brings the assurance of a reliable and knowledgeable ally. Trust their expertise to streamline your trade finance operations, mitigate risks, and facilitate successful transactions in the dynamic world of international commodity trading.

Agro Maritime Commodities

Agro Maritime Commodities is a full service bulk supplier of agricultural commodities and the first corporation worldwide to offer an online auction for commodities.

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