Standby letter of credit

http://www.eur-export.com/anglais/apptheo/finance/risnp/lcsba.htm

In a commercial sense, the stand-by letter of credit guarantees the obligations of a purchaser to pay for goods or services. It consists of the irrevocable engagement of a bank to compensate its beneficiary when the order giver proves to be inefficient. Stand-by letters of credit are used against the remittance of documents which can sometimes limit themselves to the declaration made by the credit or that the debtor has not settled his obligations.
Note : It is easier to interpret this diagram by following the numbering which is designed to take you step by step through the transaction as it unfolds.

The seller will only produce the contract when he has received notification of his payment guarantee being issued through the stand-by letter of credit. The notification either reaches him via the issuing bank, or a second bank situated in his country and plays the same role as documentary credit. Once the goods are ready, they are sent to the purchaser. Normally, payment follows. The vast majority of commercial transactions, furthermore function without incident.

If payment does not however occur, then the stand-by letter of credit comes into play. The unpaid seller asks for the guarantee in the form of a request signed by him and certifying that the purchaser has not fulfilled his payment obligations. He will enclose the documents declaring when the stand-by letter of credit was issued, proving that, for his part, he has fulfilled his obligations properly. It results in payment by the issuing bank.