A standby letter of credit can help your business grow
Part 1 of a 3-part series about international business
In business, deals don't always go as intended, so having a backup plan can save the day. If you're in a tough financial or contractual situation, such as doing business internationally or on a large construction project, a standby letter of credit—the backup plan—can open up opportunities for your business that might not otherwise be available.
A standby letter of credit is a guarantee of payment by a bank on your behalf. As long as the terms of the standby letter of credit are met, the seller is assured of receiving payment even if you have a cash flow crunch awaiting payment from your own customers, go out of business or declare bankruptcy. A standby letter of credit makes sellers more willing to do business with you because they are relying on the bank's creditworthiness, not yours. The standby letter of credit is never meant to be used, but prevents contracts from going unfulfilled in the event something goes awry.
Understand different types of standby letters of credit
Two different kinds of standby letters of credit are commonly used:
- Performance standby letter of credit. These letters ensure that nonfinancial contractual obligations are performed in a timely and satisfactory manner. For example, a contractor may agree to complete a construction project within a certain time frame. When the deadline arrives, the project remains unfinished. If a performance standby letter of credit was used, the contractor's customer can collect from the contractor's bank, which issued the letter.
- Financial standby letter of credit. These letters ensure that financial contractual obligations are fulfilled. If the buyer doesn't pay the seller in a timely manner, or if certain other terms of the contract aren't met, the seller can collect from the buyer's bank, which issued the letter.
Standby letters of credit may include a variety of requirements beyond the buyer paying the amount due upon presentation of substantiating documentation. If you're using the letter for overseas deals, you may want to consult experts, including an international shipping specialist, about the proper terminology and safeguards so that all of your interests and concerns are included and protected.
We can help at either end of the deal
If you're ready to drive business growth and increase your company's competitiveness, using a standby letter of credit can help establish trust with your business partners and make them more likely to sign contracts and do business with you. You can apply for a standby letter of credit from California Bank & Trust at your convenience. Remember that you will need to provide proof of creditworthiness or collateral.
If you're using a standby letter of credit issued by the other party's bank in some of your contracts, contact California Bank & Trust for assistance in complying with the letter's terms so you will be paid in full within the agreed time limit. Our seasoned international banking specialists will work with you to help protect your interests.