A letter of credit does not have any specific features that the buyer must adhere to for the completion of a transaction. It does have basic requirements such as documentation, packing, etc. But all in all, it’s a plain vanilla payment instrument.

A standby letter of credit may have specific clauses that the buyer must fulfill so he can use this instrument.

The Requirement of Issuing Bank

When issuing a letter of credit, the bank checks the buyer’s credibility and credit score. Furthermore, it is usually the case that a buyer asks his banker for a letter of credit, i.e. the buyer is usually dealing with the said bank for a long time. So, the letters of credit are usually unsecured.

Conversely, a standby letter of credit creates an obligation for the bank, therefore the bank will require collateral in the form of security to issue a standby letter of credit.

Goal

The letter of credit is a primary instrument of payment, so the goal is to use the letter of credit to complete the transaction.

In contrast, a standby letter of credit is a secondary instrument of payment. If a seller is paid by a standby letter of credit, it means that something went wrong. The goal here for all the parties involved is to avoid using a standby letter of payment.

Time Period

A letter of credit is a short-term instrument, where the expiry is upon good received by buyer (LC at sight) or usually 90 days (usance LC).

A standby letter of credit is a long-term instrument, in which the validity is usually one year or so stated within the terms of the instrument.

Purpose

A letter of credit is used to provide security for a transaction such as a sale agreement.

A standby letter of credit is often used to provide security for a long-term obligation such as a long-term construction project.

Geographical Scope

A letter of credit is usually used in an international transaction where the buyer is the importer and the seller is the exporter.

A standby letter of credit is used in an international transaction but it is also frequently used in domestic transactions as well. Its scope is not limited to any geographical area.

Cost

Apart from the standard bank charges, a standby letter of credit is more expensive than a regular letter of credit. While the fees of a regular letter of credit range around 0.125% of the amount covered, a bank may charge anywhere from that to 5% to cover the same amount under a standby letter of credit.