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Re: [infoguys-list] I have a question... Answer Part II

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  • Bob Hrodey
    ... Here s a better definition: *Standby Letter of Credit* The standby letter of credit serves a different function than the commercial letter of credit. The
    Message 1 of 3 , Jan 13, 2006
      on 1/13/2006 8:50 AM Ricky Gurley said the following:

      > To all,
      > I was reading an article in the newspaper the other night about
      > a fraud case here in Columbia, MO. In this article the term "Standby
      > Letter of Credit" was mentioned. I asked an associate of mine (the
      > only person I actually go to; if I have a questions about anything
      > that pertains to fraud cases and such), my associate was kind enough
      > to explain to me what was meant by a "Standby Letter of Credit". The
      > explanation sounded to me like what I have heard used to explain a
      > simple Letter of Credit from a person's bank.
      > Is there a difference between a "Standby Letter of Credit" and
      > a "Letter of Credit"? If so, would someone please be kind enough to
      > explain it to me?

      Here's a better definition:

      *Standby Letter of Credit*
      The standby letter of credit serves a different function than the
      commercial letter of credit. The commercial letter of credit is the
      primary payment mechanism for a transaction. The standby letter of
      credit serves as a secondary payment mechanism. A bank will issue a
      standby letter of credit on behalf of a customer to provide assurances
      of his ability to perform under the terms of a contract between the
      beneficiary. The parties involved with the transaction do not expect
      that the letter of credit will ever be drawn upon.

      The standby letter of credit assures the beneficiary of the performance
      of the customer's obligation. The beneficiary is able to draw under the
      credit by presenting a draft, copies of invoices, with evidence that the
      customer has not performed its obligation. The bank is obligated to make
      payment if the documents presented comply with the terms of the letter
      of credit.

      Standby letters of credit are issued by banks to stand behind monetary
      obligations, to insure the refund of advance payment, to support
      performance and bid obligations, and to insure the completion of a sales
      contract. The credit has an expiration date.

      The standby letter of credit is often used to guarantee performance or
      to strengthen the credit worthiness of a customer. In the above example,
      the letter of credit is issued by the bank and held by the supplier. The
      customer is provided open account terms. If payments are made in
      accordance with the suppliers' terms, the letter of credit would not be
      drawn on. The seller pursues the customer for payment directly. If the
      customer is unable to pay, the seller presents a draft and copies of
      invoices to the bank for payment.

      The domestic standby letter of credit is governed by the Uniform
      Commercial Code. Under these provisions, the bank is given until the
      close of the third banking day after receipt of the documents to honor
      the draft.

      More terms defined at:



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