A Standby Letter of Credit (SBLC) is a type of financial instrument issued by a bank that is a form of guarantee or promise of payment made by a bank on behalf of one party (the buyer or applicant) to another party (the beneficiary). In essence, a Standby Letter of Credit is a form of insurance or guarantee issued by a bank to a beneficiary that should the buyer fail to perform under a contractual arrangement, the bank will make the required payments to that beneficiary. SBLCs are typically used for international trade and are a common form of payment used by international buyers and sellers to protect themselves against buyer default.

SBLCs are typically issued by the buyer's bank in favor of the seller as a form of assurance that payment will be made should the buyer default on their payment obligation. For example, if a buyer enters into a contract to purchase goods from a seller, the buyer may request the seller to provide them with a Standby Letter of Credit from their bank as a form of insurance. In the event that the buyer fails to make payment according to the terms of the contract, the seller can submit the SBLC to their bank for payment. The banking institution will then pay the beneficiary (the seller) an agreed-upon amount in accordance with the letter of credit.

SBLCs are also often used for purposes other than international trade - for example, to guarantee performance on a real estate project which requires a large investment up front. Additionally, SBLCs can also be used to finance larger purchases, such as a property purchase or development project. By providing a bank guarantee of payment, the buyer is able to access finance much easier than they would if they were relying on the traditional methods of securing a loan or line of credit.

SBLCs are highly sought after financial instruments as they provide buyers with a reliable source of assurance that the contract will be completed and payment will be made if the buyer reneges on their agreement. It also provides a risk-free option for sellers as they can easily demand payment in the event of default. Overall, Standby Letters of Credit provide an additional level of security and protection for both buyers and sellers in any easily-verifiable form of payment agreement.