When businesses step into international trade, they usually come across different instruments that may appear the same at first glance. Two of the most common instruments are Letter of Credit (LC) and Standby Letter of Credit (SBLC). However both of them involve an issuing institution and provide support within a commercial transaction, they are used for different purposes.
Understanding the difference between SBLC vs LC is very important for importers, exporters, commodity traders, manufacturers, and other businesses who are engaged in cross-border transactions. Choosing an appropriate instrument depends on the nature of the transaction, the agreements between the parties, and what the buyer and seller require.
For businesses working in international trade, knowing how these instruments work can make commercial discussions more clear and it also helps in avoiding confusion before a transaction begins.
What Is an LC?
A Letter of Credit (LC) is a commonly used trade finance instrument in international import and export transactions. It is generally used when the seller wants a specific payment process affiliated to the presentation of specified documents that meet the terms and conditions of the LC.
Let’s take an example, an importer may purchase goods from a cross border supplier. Because the buyer and the seller work in different countries, the seller will need good certainty around the transaction before shipping the goods. An LC can provide a defined process through which the seller presents the required documents after shipment.
The documents can include a commercial invoice, transport document, packing list, certificate of origin, certificate of inspection, or other documents specified in the LC. The exact requirements depend on the transaction.
An LC is commonly used to give support to the purchase and shipments of the goods. It is particularly relevant when the transaction involves clearly defined shipments and documentary requirements.
What Is an SBLC?
A Standby Letter of Credit (SBLC) works in a different way. It is generally designed to provide support if the applicant does not meet a specified obligation under the underlying agreement.
Unlike a traditional LC, an SBLC is not normally intended to be the primary method for completing an ordinary shipment transaction. Instead of that it acts like a standby arrangement that can be drawn upon when the conditions stated in the SBLC are met.
SBLCs are used across various types of commercial transactions, including international trade, community transactions, infrastructure projects, and other business arrangements.
SBLC vc LC: Key difference between the two
The simplest way to understand SBLC vs LC is to look at their main purpose.
An LC is generally used as a part of a normal transaction process, particularly where the presentation of documents is linked to the trade transaction. An SBLC, on the other hand, is generally a standby instrument that supports an underlying obligation and it acts as a backup payment if the conditions for drawing arise.
Feature |
LC |
SBLC |
| Main purpose | Supports a specific trade transaction | Provides standby financial support |
| Common use | Import and export transactions | Trade, commercial and project-related transactions |
| Typical activation | Documents are presented according to LC terms | Drawing occurs when specified conditions are met |
| Primary focus | Transaction and shipment | Underlying obligation |
| Common users | IMporters and exporters | Business, commodity traders and project |
How Does an LC Work?
The process usually starts when a buyer and seller agree to use an LC for their transaction. The buyer approaches the issuing Bank and requests an LC in the favour of the seller.
Once the LC is issued and communicated to the relevant parties, the seller reviews its terms. The seller then prepares and ships the goods according to the commercial agreement.
After shipment, the seller presents the documents specified in the LC. The documents are examined against the conditions stated in the instrument. If the presentation complies with the applicable terms, the transaction proceeds according to the LC.
This is why accuracy is very important when working with an LC. Even a small difference between the required documents and the documents presented can create additional work or delays.
How Does an SBLC Work?
The process for an SBLC is different because it is generally not designed to support the routine movement of goods in the same way as a documentary LC.
The applicant requests an SBLC based on the requirements of the underlying commercial agreement. The issuing institution then issues the SBLC in favour of the beneficiary.
The SBLC remains available according to its stated terms. If the applicant meets the obligations mentioned in the agreement, the SBLC may need to be drawn.
If the conditions specified in the SBLC are met, the beneficiary can make a presentation in accordance with the instrument’s requirements.
SBLC vs LC for Importers and Exporters
For importers and exporters, the choice between an LC and an SBLC depends largely on the purpose of the transaction. An importer who is buying goods from an overseas supplier may use an LC when the transaction needs a documentary process connected to the shipment. The seller can then prepare the required documents and present them according to the LC terms and conditions.
An exporter may be more appropriate where the parties need standby support for mentioned obligation instead of going for a primary documentary process for each shipment.
For example, a business involved in a long-term supply agreement may use an SBLC as part of the wider commercial arrangement, while individual shipments may be handled separately.
Conclusion
Understanding SBLC vs LC is very important for businesses involved in international trade. While both the instruments are able to support cross-border transactions, they act differently for different purposes. An LC is generally connected to the normal trade and documentary process, while an SLC is typically designed to provide standby support for an obligation.
The right choice totally depends on the transaction, commercial agreement, documentary requirements, and expectations of the parties involved in it. Businesses that understand these differences can approach international trade discussions with clarity and make better decisions.
For businesses who are looking for SBLC, DLC, and BG solutions, Yield 4 Finance provides trade finance support for international business and international transactions.