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Simple English definitions for legal terms
standby letter of credit
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A quick definition of standby letter of credit:
A standby letter of credit is a document issued by a bank that promises to pay a third party if the bank's customer fails to fulfill their obligation. It's like a safety net for the third party, ensuring that they will still receive payment even if the customer doesn't follow through. Standby letters of credit are often used in business transactions and are governed by commercial law.A more thorough explanation:
A standby letter of credit is a type of letter of credit that serves as a guarantee for a monetary or non-monetary obligation. It is issued by a bank at the request of a customer, and it promises to pay a beneficiary if the customer fails to fulfill their obligation. The standby letter of credit is governed by Article 5 of the UCC.
For example, a construction company may request a standby letter of credit from their bank to guarantee their performance on a project. If the company fails to complete the project, the bank will pay the beneficiary (such as the project owner) the amount specified in the letter of credit.
Another example is a standby letter of credit used in international trade. A seller may request a standby letter of credit from the buyer's bank to ensure payment for goods shipped. If the buyer fails to pay, the seller can draw on the letter of credit.