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.