A letter of credit is usually to provide a method of payment for goods, such as importing widgets from Croatia.
A standby letter of credit is to pay for something not performed, a performance bond. It is used a lot of times in construction such as a stand-by LC to ensure (for example) that sidewalks are put in for the project. If not, the city will call the letter of credit and use the funds to put in the improvements.
The regular LC is (usually) secured by the goods which will be resold. The standby would be used if the customer is not in a position to complete the work.
Some classic definitions:
Investopedia explains 'Letter Of Credit'
Letters of credit are often used in international transactions to ensure that payment will be received. Due to the nature of international dealings including factors such as distance, differing laws in each country and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade. The bank also acts on behalf of the buyer (holder of letter of credit) by ensuring that the supplier will not be paid until the bank receives a confirmation that the goods have been shipped.
Stand-by LC
A guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party. Standby letters of credit are created as a sign of good faith in business transactions, and are proof of a buyer's credit quality and repayment abilities. The bank issuing the SLOC will perform brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then send notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Also known as a "non-performing letter of credit".
I do not know if they are different for call reporting or capital purposes.
Last edited by Southern Banker; 10/17/12 03:39 PM. Reason: add definition
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