What is standby letter of credit?

Standby letter of Credit: The letter of credit serves as a guarantee from the bank, which is presumably a disinterested third party. If the bank's customer fails to do something (like pay on time, complete a project on time, or satisfy certain terms of an agreement) the bank – not the customer who failed to deliver – pays the beneficiary.

Example #1: an exporter sells goods to a foreign buyer who promises to pay within60 days. If the payment never comes (and a standby letter of credit was used) the exporter can collect payment from the importer’s bank. The importer’s bank will have already evaluated the importer’s credit, and the bank assumes (or hopes) that the importer will repay the bank. Sometimes collateral is required as well. This is an example of a financial standby letter of credit.

Example #2: a contractor agrees to complete a construction project within a certain timeframe. When the deadline arrives, the project has not been completed. If a standby letter of credit was used, the contractor’s customer can collect payment from the contractor’s bank (consider it a penalty, funding to bring in another contractor to take over mid-project, or "something for your time"). This is an example of a performance standby letter of credit

Standby LC means bank will give you the guarantee that, if customer fail to pay the amount within the terms of payment, then bank will pay the money to you. bank already have evaluated the money from the importers. its only the guarantee for the payment, all other conditions are remains the same out of the L/c.