What are Standby Letters of Credit?
Letters of Credit are internationally recognized financing instruments that can be used to support a range of situations including performance under a contract, payment to a supplier, workers' compensation, and industrial revenue bonds.
A Standby Letter of Credit can eliminate the need for cash deposits or more complicated guarantees like bid bonds or performance bonds.
Is a Standby Letter of Credit for You?
M&T Bank uses Standby Letters of Credit to provide financial support in the following situations:
- The exporter is involved in large international projects, which often require bid bonds to assure that the original bid will be honored by the selected company
- The importer may require a performance bond to ensure the completion of a project in accordance with the terms and conditions – a Standby Letter of Credit provides financial reimbursement in the event of default by the exporter
- If advance payment is required by an exporter for working capital, the Standby Letter of Credit can function as a payment guarantee to assure payment if the exporter cannot perform
- When a trade relationship is established between an importer and exporter on “open account,” a Standby Letter of Credit in favor of the importer can function as a guarantee
How a Standby Letter of Credit Works
- Your company works with its M&T Bank Relationship Manager to obtain credit approval and complete the necessary legal documentation.
- Once the Standby Letter of Credit facility is established, you submit an application and complete an Agreement for Irrevocable Letter of Credit (Standby).
- M&T Bank issues the Standby Letter of Credit in favor of the beneficiary, the party with whom your company has entered into a contract agreement.
- In the event of drawings, M&T Bank verifies the documents, pays the beneficiary, and charges your account.
Types of Standby Letters of Credit
M&T Bank offers a variety of Standby Letters of Credit. A Standby Letter of Credit is typically not drawn unless the issuer of the Letter of Credit has failed to perform accordingly to the transaction. Generally, these are domestic transactions where you and the Beneficiary are located in the same region/state/country.
- Provide assurance to a Beneficiary regarding your
- Promises to pay the Beneficiary upon presentation of documents conforming with the terms and conditions specified in the Letter of Credit
- Provides assurance to a Beneficiary regarding your
- Promises to pay the Beneficiary against presentation of a documentary demand conforming with the terms and conditions specified in the Letter of Credit
Direct Pay Standby (VRDB)
- Often drafted by legal counsel as a
credit enhancement for a bond issuance
- Generally for a project with a public element, i.e., schools, hospitals, senior citizen housing, etc.
- Unlike other Standby Letters of Credit, the Direct Pay Letter of Credit will be drawn on for payment and is the financial vehicle for payment
Direct Pay Letters of Credit >
To get started, call your M&T Relationship Manager or our
International Trade Finance Group to obtain credit approval and complete the necessary legal documentation.