Introduction: Sometimes known as the SLOC, the standby letter of credit is a versatile financial document that promises to have funds drawn down upon the applicant’s failure to meet particular responsibilities. Oxford Credit Banque offers several standby letter of credit products designed to serve the varying needs of home and international commerce. In this blog entry, I am going to outline the kinds of standby letters of credit available through OCB and how they will assist your business.
1. Performance Standby Letter of Credit
A Performance Standby Letter of Credit is so used that the applicant performs and obeys the obligations mentioned under a contract. In case such obligations are defaulted by the applicant, then the beneficiary can draw money from the SLOC on account of losses suffered on the account of non-performance.
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- Use Case: Common in construction contracts, service contracts, and supply contracts
- Benefits:
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- Protects beneficiary from losses on account of non-performance.
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- Avails the benefit of guaranteeing security to the beneficiary in receiving payment to the effect.
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- It boosts the creditworthiness of the applicant in competitive bidding scenarios.
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2. Financial Standby Letter of Credit
A Financial Standby Letter of Credit is a guarantee of payment if the applicant defaults on some other financial obligation. SLOCs are most commonly used for loan guarantees, lease guarantees or to secure any other type of financial obligation.
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- Use Case: It is largely used in loan agreements, lease agreements, and bond issuances.
- Benefits:
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- Guarantees that if there is an incidence of default, the beneficiary gets payment within the required time frame.
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- Reduces the risk of financial loss for lenders as well as lessees.
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- Improves the financial standing and creditworthiness of the applicant.
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3. Bid Bond Standby Letter of Credit
A Bid Bond Standby Letter of Credit is widely used in the bidding stage of a big project in construction and the public sector contracts. The applicant is ensured to enter into a contract by fully responding after being granted the contract and providing the performance bonds.
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- Use Case: Construction bidding processes and government procurement contracts.
- Benefits:
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- He ensures that he will fulfill the contract if he wins.
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- Liability for the beneficiary in case the bidder withdraws or cannot supply the bid.
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- It also ensures that one gets tenders easily as it presents the applicant based on their creditworthiness.
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4. Advance Payment Standby Letter of Credit
An Advance Payment Standby Letter of Credit safeguards the beneficiary in advance payment scenarios in which the goods or services are yet to be delivered. If the applicant does not deliver, the SLOC provides for return of the advance payment back to the beneficiary.
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- Use Case: Normally applied in contracts in which the beneficiary is required to pay for an order in advance, such as manufacturing or business involving massive procurement.
- Benefits:
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- Protects the beneficiary in advance payments.
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- Increases the likelihood of not causing financial damage in case the applicant fails to fulfil his promise.
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- Promotes trust among parties since it protects advance payments.
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5. Commercial Standby Letter of Credit
This type of SLOC ensures the payment of goods or services in case the applicant defaults on paying obligations under a commercial contract. It is used mostly in international trade but also often in more important domestic transactions.
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- Use Case: Suitable for trade transactions, where the risk is high or parties are not known to each other.
- Benefits:
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- This ensures that the beneficiary is paid if the applicant fails to do so.
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- It promotes trade since it gives a guaranteed way of getting paid.
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- It assists applicants negotiate better terms as it offers a surety cover for payment.
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6. Customs Bond Standby Letter of Credit
A Customs Bond Standby Letter of Credit is specifically drawn up to ensure the payment of customs duties, taxes, and other related charges in international trade. This SLOC assures that the importer meets all the fiscal liabilities prior to a customs authority.
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- Use Case: The importers used it to ensure payment of customs duty and taxes.
- Benefits:
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- It simplifies imports by ensuring customs duty paid.
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- Protects the beneficiary (customs authorities) from losses due to non-payment.
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- Ensures smooth clearing of customs as it provides a safe guarantee of payment.
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7. Insurance Standby Letter of Credit
An Insurance Standby Letter of Credit covers the payment of an insurance premium or claim. It acts to safeguard the insurance company, aware that the applicant will satisfy their financial commitments under the terms of the insurance policy.
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- Use Case: Applied in an insurance contract, especially the huge or risky policy.
- Benefits:
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- The premium or claims arising out of the insurance should be paid on time;
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- Less risk for the companies thus increasing chances of getting some applicants get the cover up;
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- Enhance the applicant- insurer’s relationship through a guarantee in a timely payment.
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8. Retainage Standby Letter of Credit
A Retainage Standby Letter of Credit is applied in construction contracts to guarantee payment of the retained percentage (portion of the contract payment withheld until the project completion) to the contractor. This SLOC guarantees the contractor that retainage will be paid if the project is completed satisfactorily.
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- Use Case: Commonly applied in construction contracts where retainage is used and retained until such time the project is completed.
- Benefits:
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- Protection of the contractor’s financial interest by making sure a part of the retained percentage – retainage – will be paid.
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- This ensures that the project is completed before making the last payment, which means security to the project owner.
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- It eases the process of project completion by giving a clear guarantee of making the payments.
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Conclusion:
Oxford Credit Banque offers many SLOCs which could especially be provided to answer the various needs of various business activities in construction, international trade, and financial operations. With OCB’s SLOCs, ensure the security, reliability, and assurance of your business. The right SLOC means minimised risks, protected interests, and close relationships among business partners.