The most common type of letter of credit used in financing transactions. Standby letters of credit are used primarily to provide third-party credit support to the beneficiary for specific obligations of the applicant for the letter of credit. Like commercial letters of credit, the rights of the beneficiary under a standby letter of credit are independent of the contractual arrangements between the beneficiary and the applicant.

However, unlike commercial letters of credit, which are used to pay the beneficiary when it performs its duties, with standby letters of credit the parties expect the applicant to make all payments to the beneficiary according to the underlying agreement between them and that the standby letter of credit will not be drawn. The standby letter of credit is drawn on by the beneficiary only if (and to the extent) the applicant breaches its obligation to make the payments required by the underlying agreement.

For more information on standby letters of credit, see Practice Note, Letters of Credit in Financing Transactions: Overview and Comparing Types of Credit Support in Sale of Goods Transactions Checklist. For a standard form of standby letter of credit, see Standard Documents, Standby Letter of Credit.