A supply contract arrives with a clause asking one party to provide a standby letter of credit, often shortened to SBLC. The party asked has used documentary credits for years and assumes the standby is the same instrument under another name. It is not. A commercial credit is built to be drawn every time goods ship. A standby is usually built in the hope that it will never be drawn, and that difference changes what the documents require and where the risk sits.
Short answer. A standby letter of credit is a bank's independent undertaking to pay a named beneficiary on presentation of the demand and documents the standby specifies. As ICC Academy's guide describes it, a standby is normally a secondary payment vehicle, a "payment of last resort" drawn when the applicant has failed to pay or perform, and most standbys are never drawn at all. A commercial documentary credit is the primary payment vehicle: the ordinary route of payment for the goods. The exception is the direct-pay standby, issued to support a bond offering, which the same guide describes as the primary payment mechanism for the bond, drawn periodically. ICC Academy, guide to standby letters of credit In a commodity sale contract, a standby is typically used in the secondary way, as a backstop for payment or performance. Standbys can be issued subject to the International Standby Practices (ISP98) or to the International Chamber of Commerce's (ICC) Uniform Customs and Practice for Documentary Credits (UCP 600) "to the extent applicable", and they are close in function to demand guarantees under the ICC's Uniform Rules for Demand Guarantees (URDG 758). The rules chosen, and above all the drawing conditions written into the standby, decide how exposed the applicant is.
Primary versus secondary: the distinction everything follows from
| Commercial documentary credit | Standby letter of credit | Demand guarantee | |
|---|---|---|---|
| Ordinary expectation | Drawn on each shipment | Usually not drawn unless the applicant defaults; direct-pay standbys are the exception | Not drawn unless the applicant defaults |
| What triggers payment | Complying documents evidencing shipment | A complying demand, often with a statement of default | A complying demand, supported by a statement of breach under URDG 758 unless the guarantee excludes it |
| Typical documents | Invoice, transport document, certificates | Often only a demand (or draft) and a simple drawing statement; sometimes a third-party document | Demand and statement of breach, plus any documents the guarantee specifies |
| Rules usually named | UCP 600 | ISP98, or UCP 600 to the extent applicable | URDG 758 |
| Who carries the risk of an unjustified draw | The applicant, but shipment documents must be presented | The applicant, unless the drawing conditions are tighter | The applicant, within the guarantee's terms |
The table summarises general practice; the instrument's wording, the rules it incorporates and the governing law decide in each case. The ICC Academy guide notes that most standbys are payable against only a draft and a simple drawing statement, and that this allows for the possibility of an improper drawing; it also says a beneficiary requesting payment in error, by accident or on purpose, is more likely with a standby than with a commercial credit. ICC Academy
US banking regulation draws the same line. The Federal Deposit Insurance Corporation's (FDIC) definition treats a standby as an obligation to repay money borrowed, to pay an indebtedness, or to pay on a default in performance, and excludes commercial credits that the issuer expects the beneficiary to draw and that do not guarantee payment of a money obligation. 12 CFR 337.2 That is a US regulatory definition, cited here only because it states the distinction clearly.
ISP98: rules written for standbys
ISP98 was developed under the auspices of the Institute of International Banking Law & Practice, endorsed by the ICC as ICC Publication No. 590, and took effect on 1 January 1999. IIBLP, ISP98 As published in the ICC Digital Library, the rules state that a standby is irrevocable, independent and documentary; that the issuer's obligations to the beneficiary are not affected by its rights and obligations towards the applicant; and that defences based on fraud or abuse are left to the applicable law. Their stated scope includes performance, financial and direct-pay standbys. ICC Digital Library, ISP98
ISP98 also deals with problems that arise with long-lived undertakings. For example, if the place for presentation is closed on the last business day for presentation, it extends the deadline to a period after that place reopens, and it sets its own time standard for giving notice of dishonour. These practical differences are one reason to name rules drafted for standbys.
Where UCP 600 still applies, and its limits
UCP 600 states that it applies to standby letters of credit to the extent to which it may be applicable, where the credit expressly incorporates it. ICC, UCP 600, article 1 Much of UCP 600 deals with transport documents, insurance documents and shipment dates, which a standby supported only by a demand and a statement may never use. The practical question is which provisions actually govern the points that matter for a standby: presentation, examination, expiry and interruptions.
One example: under UCP 600's force majeure article, a bank will not, on resuming business, honour a credit that expired while its business was interrupted, whereas ISP98 extends the deadline for a period after the place for presentation reopens. For a standby that backs a long supply contract, that difference could decide whether a valid claim can still be made. Ask which rules the standby incorporates before agreeing to it.
The demand guarantee alongside it
A demand guarantee under URDG 758, in force since 1 July 2010, is also an undertaking that is independent of the underlying relationship, and the guarantor must pay a complying demand. ICC Academy, URDG 758 guide One practical difference matters here: as published by the ICC, URDG 758 requires the demand to be supported by the beneficiary's statement indicating in what respect the applicant is in breach, unless the guarantee expressly excludes that requirement. ICC Digital Library, URDG 758
That statement does not prove breach, and the guarantor does not investigate it. But it forces the beneficiary to commit to a stated ground, which can matter if the draw is later challenged.
Why simple drawing requirements invite abuse
Because a standby is independent, the issuing bank examines whether the demand complies with the standby, not whether the applicant really defaulted. If the standby asks only for a signed statement that the applicant "has failed to perform", a beneficiary who signs that statement presents a complying demand.
The applicant's remedy then usually lies against the beneficiary, under the underlying contract, after payment. Whether payment can be stopped before it happens depends on the governing law's fraud or abuse rules and on court procedure. Two reference points were checked for this article:
- In the United States, Uniform Commercial Code §5-109 allows a court to enjoin honour only if specified conditions are met, including that the applicant is more likely than not to succeed on its claim of forgery or material fraud, and it protects certain parties who acted in good faith, such as a nominated person who gave value without notice of the fraud. UCC §5-109 This is US state law and says nothing about how courts elsewhere approach the question.
- The UN Convention on Independent Guarantees and Stand-by Letters of Credit contains fraud and provisional-measures provisions, but the status page of the UN Commission on International Trade Law (UNCITRAL) listed only eight states as parties when checked on 22 September 2026, not including the UAE, the UK or the US. UNCITRAL, status
This article does not describe the position under any other governing law; if a draw may be contested, take advice in the relevant jurisdiction. The practical lesson is that the applicant's protection has to be written into the standby before it is issued.
Reasonable uses in food and commodity supply
The ICC Academy guide lists standby types including advance payment, bid or tender, commercial, financial, performance, direct-pay and counter standbys. ICC Academy Three of them map directly onto a supply contract:
- Payment backstop. A buyer trading on open account provides a standby that the seller can draw if an invoice goes unpaid. ICC Academy notes that commercial standbys are commonly used in open-account trade to give suppliers payment assurance and reduce the need for cash in advance. ICC Academy, key trade finance products
- Performance security. A seller provides a standby that the buyer can draw if deliveries are not made as contracted.
- Bid security. A bidder provides a standby that supports its tender for a supply contract.
A standby can also back an advance: if a buyer is asked to pay before shipment, the seller's bank can issue a standby or guarantee that supports repayment. How a buyer weighs that option against staged payments and inspection is covered in our guide to how much advance payment is reasonable.
What to write into the standby and the contract
The standby is the operative document for the bank; the contract governs the parties' rights between themselves. Both need attention.
In the standby:
- Rules: ISP98 or UCP 600, named explicitly.
- Amount and reduction: whether the amount falls as shipments or payments are completed, and what document evidences each reduction.
- Expiry: a fixed date, and whether any extension is automatic.
- Drawing documents: a statement identifying the specific obligation missed and the date it fell due; a copy of prior written notice to the applicant; if it can be negotiated, a document from an independent party.
- Presentation: where, how and in what form, including any electronic method.
- Partial and multiple draws: whether they are permitted.
In the underlying contract: the specific events of default; notice and cure periods before any draw; an obligation to repay any amount drawn beyond the actual loss; the governing law and forum. These terms do not bind the bank, but they define when a draw is a breach of contract.
What issuing a standby costs the applicant
A standby that is never drawn is not free. The issuing bank takes on a contingent obligation to pay, so it will assess the applicant's credit for the amount until the standby expires or is released, which may mean using part of a credit facility or providing security. UK Export Finance, for example, says a bank that issues a bond will typically require collateral from the exporter, usually a cash deposit, and offers a government guarantee of part of the bond to reduce that burden for eligible UK exporters. UK Export Finance, Bond Support Scheme That is a UK scheme, cited to show the kind of requirement involved.
The ICC Academy guide notes that an applicant will pay an issuance fee of some type. The amount, and any collateral, depend on your bank and your credit standing. Ask for a written quotation covering the fee, the facility or collateral required, and when the facility will be released.
Two drafting points therefore protect the applicant's own finances as well as its legal position: an expiry date that matches the real risk period, and a reduction mechanism that frees capacity as obligations are performed.
Checking a standby you are asked to accept
A beneficiary relying on a standby should test it as carefully as an applicant drafting one. The same discipline applies to a commercial credit; see reading an LC before you accept it.
- Authenticity. Receive it through your own bank or an advising bank, not only as an emailed scan, and have your bank authenticate it.
- The issuer. Is the issuing bank one you, or your bank, would rely on? If not, ask your bank whether confirmation by another bank is available and what it would cost.
- Your ability to draw. Could you produce every required document, at the stated place and within the expiry, if the applicant defaulted? A standby you cannot draw on in practice is not security.
- Expiry against the contract. Does the standby outlast the period in which the obligation could fail, including the time needed to identify a default and prepare the demand?
- Rules and law. Are the rules named, and do you understand which law will govern a dispute about the draw?
Worked example: a delay, not a failure
Hypothetical teaching example. Parties, dates and wording are invented. No legal outcome is predicted, and this is not a Maqboola transaction.
A seller agrees to supply white sugar in three shipments. At the buyer's request, the seller's bank issues a performance standby in the buyer's favour. Day 0 is the end of the first shipment window. Berth congestion delays loading; the buyer gives written notice on day 1; the contract allows a 14-day cure period after notice, running to day 15. The cargo sails on day 8.
Version A: the standby pays on the buyer's signed statement that "the seller has failed to perform the contract". The buyer, frustrated by the delay, presents that statement on day 9. On its face the demand matches what the standby asks for, so the bank is expected to pay. The seller's argument that a cured delay is not a failure belongs in a dispute under the contract.
Version B: the standby requires a statement identifying the shipment and the contractual date missed, confirming that written notice was given and that the cure period has expired, with a copy of the notice. On day 9 the cure period has not expired (it runs to day 15), and the shipment has in fact sailed, so an accurate demand cannot comply. A demand that falsely stated otherwise would raise a question for the governing law's fraud rules, not for the bank's routine examination.
The drafting did not make the standby weaker for the buyer. It aligned the standby with what the buyer had actually been promised.
One boundary: offers to lease or "monetise" standbys
Standbys are sometimes marketed as tradable assets that can be leased or monetised to raise finance. Our guide to SBLC leasing and instrument monetisation offers explains why that pattern is not trade finance. The FBI's Internet Crime Complaint Center (IC3) has warned investors about fictitious standby schemes, stating that standbys are not investment vehicles and are not traded or bought and sold. FBI IC3, 18 March 2019 This article deals only with standbys that support a real contract.
Common mistakes
- Treating a standby as a slower version of a commercial credit and agreeing to it without reading the drawing conditions.
- Leaving the rules unstated, or incorporating UCP 600 without considering the provisions written for shipment-based credits.
- Accepting a draw on a bare statement of default for obligations the applicant does not fully control, such as berth availability.
- Setting an expiry far beyond the real risk period, which ties up the applicant's bank facility for no benefit.
- Relying on the underlying contract to stop a draw, when the contract binds the parties but not the bank.
- Accepting a scanned instrument without having it authenticated through a bank.
Issue, accept or refuse: a short checklist
- Issue a standby when it supports a real obligation you understand, under named rules, with drawing conditions you could live with if the beneficiary acted in bad faith.
- Accept one when the issuing bank is acceptable to you, the rules are named, and the drawing documents are ones you can realistically produce if the applicant defaults.
- Refuse, or renegotiate, when the standby would be drawable on a bare statement for obligations you cannot control, when the rules are unstated, or when the instrument is offered detached from any real contract.
Next step
If a sourcing enquiry to Maqboola involves security for payment or performance, include the proposed instrument wording, the rules it incorporates and the obligations it would support alongside the product and delivery details when you request a quote. Review instrument wording, bank acceptability and legal effect with your own bank and legal adviser; Maqboola is a trading company, not a bank, so instrument questions belong with your bank.
General information. This article explains cited rules and common practice for general educational purposes; it is not legal or banking advice. How a standby works, and whether a draw can be challenged, depend on its exact wording, the rules it incorporates and the governing law, so confirm the position for your transaction with your bank and a lawyer in the relevant jurisdiction.
