There are two main types of letters of credit used in business. A standby letter of credit (SBLC) is a financial instrument issued by some commercial banks to guarantee payment to a beneficiary if the applicant defaults on a contractual obligation. A standby letter of credit is a last resort source of payment ensuring that payment is made if the buyer fails to perform for any reason. The applicant applies to the bank which conducts a credit investigation. The bank then determines whether collateral is required and payment terms if the application is approved. SBLCs help companies secure contracts that might not otherwise be possible to obtain.

An irrevocable letter of credit (ILC) is a legally binding guaranteed payment instrument issued by a commercial bank on behalf of a buyer, ensuring payment to a party once specific conditions are met. It cannot be modified or revoked without the consent of all parties. Irrevocable letters of credit substitute the bank's commitment to pay instead of the buyer's commitment.

Credit Enhancement