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Guilherme Mazui

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What is the Difference Between LC and SBLC?

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A Letter of Credit (LC) and a Standby Letter of Credit (SBLC) are both financial instruments used in international trade to provide payment security to the parties involved. However, they serve different purposes and have distinct features.

Letter of Credit (LC):

  • Primary method of payment: The bank pays the supplier directly on behalf of the buyer.
  • Ensures timely payment to the seller and delivery of goods to the buyer.
  • Depends on the supplier's performance.
  • Commonly used in international trade to minimize risks for both the buyer and the seller.

Standby Letter of Credit (SBLC):

  • Secondary method of payment: The bank guarantees payment to the supplier only if the buyer defaults on payment.
  • Serves as a backup payment method used when there is a risk of the buyer's non-performance or default.
  • Depends on the buyer's non-performance or default.
  • Often used as a credit enhancement tool and considered an independent undertaking.

In summary, an LC is a primary method of payment where the bank pays the supplier directly, while an SBLC is a secondary method where payment is made only if the buyer defaults on payment. Both instruments provide financial safety in international trade transactions, assuring timely payment to the seller and delivery of goods to the buyer.

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  • What is the Difference Between LC and SBLC?
  • Comparative Table: LC vs SBLC

    • Comparative Table: LC vs SBLC

    A Letter of Credit (LC) and a Standby Letter of Credit (SBLC) are both trade finance instruments used in international trade. They are issued by banks to ensure payment between the exporter and the importer. However, there are some differences between the two:

    Feature Letter of Credit (LC) Standby Letter of Credit (SBLC)
    Purpose Primary instrument of payment, ensuring the exporter is paid. Secondary instrument of payment, providing a backup in case the importer defaults.
    Payment Ensures timely payment from the buyer to the seller. Ensures payment to the exporter only if the buyer fails to pay.
    Primary vs Secondary LC is the primary method of payment. SBLC is a secondary method of payment.
    Payment Trigger Payment is triggered when the exporter presents the required documents. Payment is triggered when the exporter presents the required documents and the buyer fails to fulfill the agreement.

    Both LC and SBLC are backed by a legal institution like a bank or a financial institution. They provide security and certainty to the exporter, ensuring that they are paid for their goods or services. However, the SBLC is designed to provide additional reassurance to the exporter in case the buyer defaults, making it a secondary payment method that comes into action when the seller meets the requirements of the Standby LC agreement.

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    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.