A Letter of Credit (LoC) is an undertaking from a bank, at the request of a buyer, to pay the supplier an agreed payment on presentation of agreed documents within a stipulated time. LoC’s offer security to both parties in a transaction for goods. The supplier can rely on the bank's status to ensure payment will be made, provided they can fulfil the contract as agreed. The buyer gets assurance that the goods as ordered have been shipped as agreed. The security of LoC’s needs to be measured against the costs of such facilities and the inevitable lack of flexibility they place on the supplier. The strict compliance that banks are obliged to impose on presented documents also causes problems; in fact, it’s reported that most requests for payment are refused at first presentation. 

When a buyer defaults on payment, an SBLC provides a 'fall-back' that suppliers can call on. Invoking an SBLC involves presenting the necessary documents to the issuing bank, which then makes the payment to the supplier. This facility is only used if direct payment from the buyer is not received, providing a safety net for the supplier. 

Issuing banks have specific rules of practice to follow for SBLC, under International Standby Practices (ISPB98) issued by the International Chamber of Commerce. Understanding these rules is crucial, as while SLBC can be seen as an unwelcome expense, it poses increased risks of country default and political risks. 

With increasing uncertainty in world finance, reliance on LoC’s as a method of payment that offers some security is a means for exporters to secure trade without exposing the business to unattractive levels of risk.