When it comes to securing business transactions, letters of credit (LCs) play a crucial role in building trust between buyers and sellers. But not all LCs are the same. If you trade internationally, sign long-term contracts, or need a financial guarantee, you will probably meet two instruments: the standby letter of credit (SBLC) and the documentary letter of credit (LC). They sound alike, but they solve different problems.
This guide explains how SBLC vs LC works in practice, where the two differ, and how to choose between them. It is general information, not legal or financial advice.
What Is a Letter of Credit?
A letter of credit is a bank’s written undertaking to pay a seller once the seller presents documents that comply with the credit’s terms. The bank checks the documents, not the goods, so both sides know exactly what must happen before money moves.
Letters of credit are used across industries, from manufacturing to technology, and they are a core tool of trade finance.
Standby Letter of Credit (SBLC)
A standby letter of credit acts as a backup payment mechanism. It is drawn on only when the applicant fails to pay or perform. In that case the issuing bank pays the beneficiary against a compliant demand. At Suisse Bank, a standby letter of credit is issued by Suisse Bank and advised by a top-tier AA+ rated bank.
They are not intended to be used unless something goes wrong.
Key features
- Acts as a secondary guarantee if the applicant defaults.
- Often used in construction projects, leasing agreements, and service contracts.
- Provides financial security without being the primary payment method.
It can be used to secure loans, support contractual obligations, and provide assurance in high-value transactions.
Documentary Letter of Credit
A documentary letter of credit is the primary payment method in a trade deal. The seller ships the goods, presents the required documents, and the bank pays when they comply with the credit. Suisse Bank offers documentary letters of credit issued by Suisse Bank and advised by top-tier AA+ rated banks.
Key features
- Pays the seller against compliant documents.
- Beneficial for sellers dealing with unfamiliar buyers
- Gives both sides a clear, document-based payment process.
Standby Letter of Credit vs Letter of Credit: Key Differences
Although both serve as financial guarantees, they function differently and are used in distinct business scenarios. The main differences are below.
- Purpose: A standby letter of credit is a safety net, while a documentary letter of credit is the primary payment method.
- Usage: Standby letters are common in service contracts and construction projects. Documentary letters are standard in goods trade, where the seller is paid once shipping documents comply.
- Trigger for payment: A standby letter is triggered if the buyer defaults on obligations A letter pays when specific conditions are met, such as document submission. The issuing bank checks every condition before it releases funds.
Suisse Bank supports both instruments, so you can match the tool to the deal.
Choosing the Right Instrument
Consider your business model, transaction type, and risk tolerance. Choose a documentary letter of credit when you are buying or selling shipped goods and want payment tied to compliant documents. Choose a standby letter of credit when you need a fallback if a counterparty defaults on a contract, lease, or service agreement.
For large sums or unfamiliar partners, first check the jurisdictions and industries Suisse Bank supports, then agree the instrument with your counterparty.
Weigh the benefits against the costs and requirements before you commit.
- Standby letter pros: It gives the beneficiary a fallback without moving funds unless a default occurs.
- Standby letter cons: Limited use for direct payment since it is only triggered in the event of default. The bank may also ask the applicant for collateral or credit capacity before issuing it.
- Documentary letter pros: A clear, document-based payment process gives the seller certainty once the documents comply.
- Documentary letter cons: Strict document checks mean even a small discrepancy can delay payment.
The parties involved (applicant, beneficiary, and issuing bank) also shape the choice, so review each transaction on its own terms.
Rules That Govern Letters of Credit
Three ICC frameworks come up most often in letter of credit work:
- Uniform Customs and Practice for Documentary Credits (UCP 600): Issued by the ICC, it sets the rules for documentary letters of credit, including the responsibilities of banks and beneficiaries and how documents are examined. A standby can also be issued subject to UCP 600 if the instrument says so.
- International Standby Practices (ISP98): Also published by the ICC, it is written specifically for standby letters of credit and covers issuing, presenting, and honoring them. The instrument should state whether UCP 600 or ISP98 applies.
- Incoterms: Created by the ICC, these trade terms define buyer and seller responsibilities and the point where risk transfers. They are contract terms, not law, but they influence the documents a letter of credit asks for.
Final Thoughts
The standby letter of credit vs letter of credit question comes down to one point: use a documentary LC to pay for a shipment, and an SBLC as a fallback if a party defaults. Matching the instrument to the deal protects both sides.
Ready to talk through your transaction? Start your application or contact our team and we will help you choose the right instrument.
Frequently Asked Questions
Q1. Can one deal use both an SBLC and a documentary LC?
Yes. They play different roles, so a deal can use a documentary letter of credit to pay for a shipment and an SBLC to secure a separate performance obligation. The right mix depends on the contract.
Q2. Which SWIFT message formats apply?
A documentary letter of credit advised by a top-tier bank is sent in MT710. Standby letters of credit, bank guarantees, and proof of funds instruments use MT760.
Q3. Does a standby letter of credit have an expiry date?
Yes. A standby normally states an expiry date, and some include extension provisions. Read the exact wording of the instrument before you rely on it.
Q4. How much does an LC or SBLC cost?
Cost depends on the instrument and the transaction. See Trade Finance Fees for Suisse Bank’s current fee information.
Q5. Is a bank guarantee the same as a standby letter of credit?
They serve a similar purpose, a payment undertaking if the applicant defaults, but they are separate instruments with different wording and rules. Suisse Bank offers a bank guarantee as well, and your advisor can confirm which one your counterparty accepts.