Legal Definitions - standby letter of credit

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.