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The standby letter of credit is very similar in nature to a guarantee. The beneficiary can claim payment in the event that the principal does not comply with its obligations to the beneficiary. Payment can usually be realized against presentation of a sight draft and written statement that the principal has failed to fulfill his obligations. A standby L/C can be used to back up a payment commitment. Therefore, an exporter may agree to sell on open account terms grating the importer 90 day credit terms on the condition that the importer open a standby credit in the exporter´s favour. If the importer fails to honor the exporter´s invoices, the exporter simply draws against the standby letter of credit. See letter of credit.
