Standby Letter of Credit

The majority of LC’s issued by banks are standby LC’s.  Standby letters of credit are used to guarantee that the account party (the bank’s client) will perform under a contract.  If the account party performs under the contract to the satisfaction of the beneficiary (the other party to the contract), the standby letter of credit expires without being funded.  If the account party defaults under the contract, the beneficiary merely sends the bank a notice of default and the bank must fund the letter of credit.

Most contracts require a number of forms of security to ensure that both parties perform as agreed for the duration of the agreement. A standby letter of credit, by definition, is designed to provide that assurance by providing financial backing for the terms of the contract. Most financial institutions require upfront payment of a fee in order to provide this additional security; the typical standby letter of credit cost is directly related to the cash amount guaranteed by the document. In most cases, a standby letter of credit is secured by some form of collateral to ensure payment in the event that the holder defaults on the contract terms. The most common use of these credit arrangements is to ensure the timely completion of work on construction contracts and building projects; in the event of default, the bank that issued the letter of credit must make payment to the beneficiary and recover their funds from the construction company directly.

Borrowers can access a variety of lending options through CNF Exchange. The online application system is easy to use and provides access to lenders and investors throughout the financial community, allowing businesses to find the right lending solution for their specific funding needs.