Standby letters of credit

Standby letters of credit can function as a safety net for exporters in international trade transactions. In this video, John Johnson discusses the basic functions of a standby letters of credit and how they differ from documentary letters of credit.

Lori Crever: Hi. I'm Lori Crever, and today I'm joined by John Johnson, relationship manager with Wells Fargo International Trade Services. We're going to talk about standby letters of credit. John, thanks for coming in today.

John Johnson: It's good to be with you, Lori.

Lori Crever: Start by telling us about your role in the Wells Fargo International Group.

John Johnson: As a Trade Services relationship manager, I get the ability to help our clients with international transactions.

Lori Crever: Excellent. What is a letter of credit?

John Johnson: Technically speaking, a letter of credit is an independent instrument issued by a bank on behalf of its customer that represents an obligation to the beneficiary to pay upon the receipt of complying documents.

Lori Crever: What's the difference between a documentary letter of credit and a standby letter of credit?

John Johnson: Letters of credits can be classified as either a documentary letter of credit or a standby letter of credit. A documentary letter of credit is the primary payment mechanism that facilitates the movement of goods in an international transaction. As such, we would always expect a draw against the presentation of shipping documents. Whereas, a standby letter of credit, simply stated, is a secondary payment mechanism and is not intended to be drawn upon. This type of letter of credit "stands by" in case another event does not occur.

Lori Crever: Tell us then, how is a standby letter of credit used specifically in international trade?

John Johnson: A standby letter of credit is an instrument issued by a bank that protects the beneficiary if the applicant fails to pay or perform to the underlying international contract. A standby letter of credit can function as a safety net. It can also serve to enhance credits or add assurance for performance. Examples of a cross-border standby letter of credit are general financial payment guarantees, such as an advanced payment bond or performance guarantees, such as a bid bond, performance bond or warranty bonds.

Lori Crever: And John, what is the strength of Wells Fargo in this transaction space of standby letters of credit?

John Johnson: The competitive advantages of using Wells Fargo for issuing standby letters of credits are our financial strength and technical expertise. On the financial side, Wells Fargo is a AA- minus rated bank. We have a $303 billion market capitalization and a $54 billion portfolio of issued standby letters of credits. In terms of technical expertise, Wells Fargo has an exceptional customer service group that assists our clients with their global standby letter of credit needs.

Lori Crever: This has been terrific, John. Thank you so much.

John Johnson: Good to be here. Thank you.

Lori Crever: If you'd like to learn more about how to position your company for success in the global marketplace, talk to your Wells Fargo International Trade Services relationship manager.