RE: [infoguys-list] I have a question.....SLC vs LC
- Dang! And to think he did all that with two fingers! ;)
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From: email@example.com [mailto:firstname.lastname@example.org]
On Behalf Of oracleintl@...
Sent: Friday, January 13, 2006 10:39 AM
Subject: Re: [infoguys-list] I have a question.....SLC vs LC
In a message dated 1/13/2006 9:52:39 A.M. Eastern Standard Time,
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?
The Standby Letter of Credit (SLC), and Letter of Credit (LC) are two very
different instruments, although the both serve the same function, which is
typically to facilitate international trade by providing security to trading
Suppose Joe in Malaysia wants to buy a million widgets, at $50 each, from
Sam in Ontario, but neither know the other well enough to be trusting - and
a large trade deal is involved, nobody is trusting who stays in business
Joe isn't going to send Sam any money til he sees his widgets, and Sam
sending widget one halfway around the globe without the security of knowing
he will be paid. Joe and Sam both know the Royal Bank of Canada (RBC), one
of the world's largest international banks, which has something like half a
trillion USD in assets.
Joe might go to RBC and have a Letter of Credit issued with Sam as
beneficiary in the amount of $50 M - either by credit, or by putting up the
would typically have his financial institution contact RBC and verify the
legitimacy of the instrument, and once it is verified proceed. The
is cashed once the deal is done - either by Joe agreeing, or by Sam proving
performance over Joe's objection.
In other words, the Letter of Credit is like a cashiers check with a
condition attached. Once the terms of the contract are met, the
the check. Please note - as this is the basis of the distinction - the LC
always cashed by the Beneficiary when everything goes right, and can be
cashed by the Beneficiary over the Buyer's objection if the Beneficiary
they met the terms of the contract.
The Standby Letter of Credit is very similar, except that when all goes
well, it is not cashed. The buyer makes payment as per the terms of the
- whatever those terms are. It serves as security for when something goes
wrong. In that case, the Beneficiary must prove that the Buyer defaulted
payment, AND prove that he (Beneficiary) met the terms of the contract and
didn't do anything wrong.
Consequently, the SLC may not be tied to a specific deal, and it may not be
drafted for the amount of any specific deal. For example, using the facts
above, let's suppose that this is not intended to be a one time purchase.
Joe might go to RBC and have an SLC issued in the amount of $100M even
though the instant deal is only worth $50M. It serves as a bond assuring
he can have faith that Joe is "good" for up to $100M. If Sam ships
perfectly good widgets, and receives his initial 50% payment on delivery as
but Joe defaults on the second payment due in 30 days, Sam moves to execute
against the SLC for $25M.
The reality is, these instruments make international trade possible because
many businesses cannot float their own deals. What may happen is Sam
to ship a million widgets within 120 days of receipt of an instrument -
either one, but in this case, let's say an SLC.
Upon receipt, Sam will start making widgets - but he doesn't have the cash
flow to buy the raw materials out-of-pocket. His bank accepts Joe's SLC as
collateral to issue an SLC to Mike who contracts to supply the raw
Mike sends the stuff to Sam so he can start making widgets knowing that if
Sam doesn't pay, Sam's Bank will.
Sam makes and ships a million widgets, knowing that RBC will pay him if Joe
defaults, making it possible for him to pay Mike. If all goes well, Joe
Sam and Sam pays Mike and the SLC's make it possible for all of them to
That's the true difference, but in my mind, the principle difference
the Standby Letter of Credit and a Letter of Credit is that scam artists
love the term, Standby Letter of Credit, and they often use the concept in
conjunction with some sort of fraud - not that there is anything inherently
sinister about the SLC, it's just that the term seems to sound good.
Bill E. Branscum, Investigator
PO Box 10728
Naples, FL 34101
(239) 304-1640 Fax
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- In a message dated 1/13/2006 10:51:09 P.M. Eastern Standard Time,
Dang! And to think he did all that with two fingers! ;)
One day, I'll learn to type, but til then, I'll just bang away with two
It's not the handicap that you'd think though. The limiting factor is the
time it takes me to figure out what I am trying to say, and word it the way I
want it. If I could type, I'd probably just blast out a lot of drivel I'd
end up redacting and revising anyway.
Vickster, you of all people must surely agree that "Faster" isn't
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