Like a DC and a bank guarantee, a standby letter of credit is a very flexible instrument for all types of business. It can cover anything from an ordinary guarantee commitment to a more sophisticated financial instrument. It is normally used in order to secure the fulfillment of contractual obligations such as payments.
When you and the buyer have agreed on the contract terms, you also need to define which of the terms are to be secured by a Standby Letter of Credit. If you have agreed to open a Standby Letter of Credit, the buyer has to contact his bank and request the issuance of the Credit.
The Standby Letter of Credit comes in to practice when the buyer fails to fulfill his payment obligations, or to perform a job or meet some other commitment called for and stated in the commercial contract. The seller can then, on demand, present the stipulated documents stated in the Credit, and the issuing bank isobligated to make the payment, provided all terms and conditions of the credit complies with credit.