Standby Letters of Credit: Important Protection for Creditors

Good faith is an important concept in the world of business. In fact, without it, very little would probably happen. This is especially true when one person attempts to do business with another, except when problems arise after one party defaults on an agreement regarding payment. It is for these cases that one party (the one being paid) asks for a standby letter of credit, or an SLOC. These are also called non-performing letters of credit.

Origins

Standby Letters of Credit were originally created by legislation that prohibited banks from engaging in business with third parties. Instead, an SLOC in effect stands as a guarantee that a creditor will be paid based on the good credit and payment history of the payer. This way a creditor knows that he will be paid based on the good faith of the bank which is standing by the creditworthiness of the payer.

An SLOC fills the gap when a person fails to fulfill a contractual commitment to a third party. It is for cases like these that the payer

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