What Is Non Operative Letter Of Credit?


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Hayley Clarke answered
A non-operative letter of credit, which is also known as a standby letter of credit, is an irrevocable and binding undertaking by the issuer, in most cases a bank, that is made at the request of an applicant, in most cases a customer of the bank, to ensure that payment is made on an obligation. It has commercial value in that it is totally independent of any agreement between the applicant and the issuer. Once the non-operative letter of credit is issued, the issuer must honor all terms and conditions and strictly comply with the document.

These are most frequently issued in the United States and are sometimes used in the United Kingdom. Because some banks are prohibited from issuing guarantees, letters of credit were developed to ensure payment or performance.

Most typically, a non-operative letter of credit is used to ensure payment of an obligation or the performance of an obligation. In the case of the performance stand-by,  the beneficiary seeks to provide sufficient funds to enable a 3rd party contractor to complete a project. When a stand-by letter of credit is used internationally, a body of international custom and practice must be developed to make sure there is uniformity in the handling of these stand-bys. It is covered by the Uniform Customs and Practice for Documentary Credits and the International Stand-By Practices.

When the stand-by is assigned, it is not usually transferable until the stand-by provides, although the proceeds may be assigned. Stand-by letters of credit are not intended to be any kind of investment instrument and there is no established market that deals in trading them. There are scams involving letters of credit that involve selling or trading them so never get involved in this type of transaction as it is against the law in many jurisdictions.

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