When it comes to financing your business, you may have heard of documentary letter of credit (DLC) and stand by letter of credit (SBLC). But what are they? How do they differ? And which one is right for your business?
In this blog post, we will compare and contrast documentary letter of credit financing vs. stand by letter of credit financing. By the end of this post, you will know which type of letter of credit is best for your business!
Documentary Letter of Credit
A documentary letter of credit for small business is a type of financing that is typically used for large purchases. With this type of letter of credit, the buyer provides the seller with a DLC, which is then used to purchase the goods or services from the seller. The DLC is a guarantee from the buyer’s bank to the seller that they will receive payment for the purchased goods or services.
If you are making a large purchase, then a documentary letter of credit is a good option.
Stand By Letter of Credit
A stand by letter of credit is a type of financing that is typically used for ongoing purchases. With this type of letter of credit, the buyer provides the seller with an SBLC, which is then used to purchase the goods or services from the seller. The SBLC is a form of guarantee from the buyer to the seller that can be drawn down on in the event the buyer doesn’t pay on time according to the invoice and selling terms..
If you are making ongoing purchases, then a stand by letter of credit may be a better option.
Types of Stand By Letter of Credit
There are two types of stand by letter of credit:
- Financial Stand By Letter of Credit
- Performance Letter of Credit
Financing Process
- The buyer provides the seller with DLC or SBLC from their bank or financial institution
- Seller accepts DLC or SBLC as guaranteed payment for buyer to purchase goods or services from seller
- Goods or services are exchanged
- Seller presents DLC or SBLC to their bank with required documents and requests payment
Advantages & Disadvantages
Advantage:
Small business Letter of Credit are great tools to use as protection for buyer and seller when dealing with international transactions. Since payments are managed from sellers bank and buyers bank, it provides the seller with a guarantee that they will receive payment for the purchased goods or services.
Disadvantage
There are some disadvantages to using a commercial letter of credit. They can be expensive and time-consuming to set up. Also, some sellers may not want to accept them depending on whether or not their bank is set up to process the payments of letters of credit.