Comparison of the Commercial and Standby Letter of Credits

Abstract

The Letter of credit as a method of smoothing international payment is a conditional security and obligation to pay the customer bank (issuing bank) to seller (applicant). For this purpose, the letters of credit may be considered as the most usual method of payment of goods price in international trade. The classic form of letters of credit is the commercial letters of credit whose financial obligation is rooted in the documents that demonstrates the making of transaction by the beneficiary and it is used as a mechanism of payment and financial security in international transaction of goods. Contrary to commercial letter of credit which is a payment document, standby letter of credit has been taken into account for protection of beneficiary in case of default of payment to perform obligation or payment.Standby letters of credit are equal to bank guarantee and issued as performance and obligation security and in the form of letter of credit. This article with cmparison of commercial letter of credit and standby letter of credit is to review the similarities and differences of these two documents and the most important legal aspects of both are compared in order to answer this question that when and in which form each of these means are used in international trade by the parties.