There are
many financial instruments which are used in the market for various purposes.
Most will provide a guarantee of some sort which will benefit one party and
will help in making the financial transactions more go through smoothly.
A standby
letter of credit or SLBC, in short, is a guarantee that is provided by the
bank. The bank issues this guarantee on behalf of the client. And this gives a
guarantee to a third party with which the client of the bank is giving a
guarantee to. A standby letter of credit is used as a last resort. Means, if
there are no other means to supply the financial demands, then this instrument
could be used and the responsibility of paying the debt goes from the client's
head to the banks head.
There are
various benefits of hiring such providers. First and foremost, it creates a
trust. Suppose you are entering into a transaction with a second party. If you
don't know the second party personally, then there will be always a doubt
created in your minds as it will be an unfamiliar territory for you. Neither
you could trust the second party but nor can you deny the transaction.
Hence there
needs to be some guarantee. This guarantee is what gives a sense of security in
the mind of the opposite party. It is always easier to enter into a transaction
if there is some kind of guarantee. Hence, SLBC provider enables the transaction to go through smoothly and
both parties can approach the deal with less hesitation in your mind.
The standby
letter of credit provides another significant purpose. These providers will
provide the letter when one has a good history of credit. Which means the
person or the organization is taking credit or loans yet, they are repaying it
in time so that it has the reputation where it does borrow loans but it repays
in time.
This
reputation is very important. When you are going into a contract, if the
opposite party does provide an SLBC, then it does imply that, that party has a
good track of its finances.
And more or less, if you are investing on the
person or in the company or organization, then your money has more chance of
being safe. Even if everything goes wrong, the bank is providing the credit so
that the transaction or the deal could physically take in place.
