Why Would a Buyer Prefer an LC While a Seller Prefers an SBLC?

When it comes to trade finance, one of the recurring debates is whether to use a commercial Letter of Credit (LC) or a Standby Letter of Credit (SBLC). At first glance they may look similar, but in practice buyers and sellers have very different preferences. Buyers lean toward LCs, while sellers often push for SBLCs. The reasons lie in how each instrument works—and in where the risks fall.

Question:

In international trade, why does the buyer often prefer a commercial Letter of Credit (LC), while the seller leans toward a Standby Letter of Credit (SBLC)?

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Answer:

A commercial LC and an SBLC serve different purposes, and that’s why preferences diverge.

• From the buyer’s side:

A commercial LC is safer because payment is only triggered when the seller presents complying documents. These documents—such as the bill of lading, invoice, and insurance—act as evidence that shipment has been made. The buyer knows the goods are at least on their way before money leaves the bank.

• From the seller’s side:

An SBLC functions more like a guarantee. If the buyer fails to pay, the seller can simply present a demand for payment, often accompanied by a statement of default, without having to gather complex shipping documents. For the seller, this means quicker and easier access to funds if something goes wrong.

• The risk for the buyer:

SBLCs shift risk toward the buyer because they may be drawn upon by a simple demand, not necessarily tied to proof of shipment. That’s why banks are often reluctant to issue SBLCs intended to cover straightforward commercial payments.

• In reality:

Despite these risks, SBLCs are still used in practice—particularly in markets where sellers hold stronger bargaining power, or in sectors such as commodity trade, construction, and long-term supply contracts, where SBLCs are a common requirement.

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Mr. Old Man