A Standby letter of credit may apply in general to transactions
which are based on the concept of default by the applicant in
performance of a contract or obligation.
In the event of
default, the beneficiary is permitted to draw under the letter
of credit. Standby letters of credit may be used as a substitute
for performance guarantees or issued to guarantee loans granted
by one firm to another, thereby securing payment to the creditor
in the event the other party fails to repay its obligation on
the due date. Even if the applicant claims to have performed,
the bank issuing the letter of credit is obliged to make payment
provided the beneficiary produces complying documents, usually a
sight draft, and a written demand for payment.