The Importance of Standby Letter of Credit in International Trade

Oct 13, 2025 by leolavanderia.com.br 89 views

Standby Letter of Credit as a Guarantee in Import Export Activities in Medan Level II Municipality

Understanding the Role of Standby Letter of Credit in International Trade

In the world of international trade, Standby Letter of Credit (SLOC) has become a crucial tool for businesses to ensure smooth transactions and minimize risks. As a form of guarantee, SLOC provides a safety net for businesses to rely on in case of payment defaults or other unforeseen circumstances. However, the effectiveness of SLOC in real-world scenarios is often hampered by various factors, including the credibility of the company involved. This article aims to explore the role of SLOC in export-import activities in Medan Level II Municipality, highlighting the challenges and benefits associated with its use.

The Importance of Standby Letter of Credit in International Trade

In the context of export-import activities, SLOC functions as a "reserve" for the recipient (beneficiary) or bank on behalf of the customer. This guarantee ensures that the buyer's payment is secured, reducing the risk of non-payment or delayed payment. By providing a safety net, SLOC enables businesses to focus on their core activities, such as production and marketing, without worrying about payment defaults.

Research Methodology

This study employed a descriptive analytical approach with a juridical normative perspective. The research location was the Medan Trade and Industry Regional Office, which hosts 124 business entities engaged in the export-import sector. A total of 22 business entities and 4 foreign exchange banks were selected as respondents through the purposive sampling method. Primary data were collected through direct interviews and questionnaires, while secondary data were obtained through additional interviews and literature studies.

Research Findings

The results of this study revealed that businesses that use payment methods with SLOC often face obstacles. In practice, transactions do not always run smoothly, and there are cases where notes are not paid, postponement of payments, or even debating that occur twice, causing payments to not be carried out. This finding highlights that although SLOC is designed as a form of payment guarantee, business actors are often hesitant to use it because of concerns about the company's credibility.

The Role of Standby Letter of Credit in Transactions

SLOC can provide certainty for business actors in transactions, but trust in this guarantee is often influenced by the reputation of the company involved. When a problem occurs, most business actors choose to resolve disputes through arbitration institutions. This is due to the fact that the arbitration institution already has a structured system and a competent arbitration to handle various issues, which are often more efficient than the general court.

Challenges in Implementing Standby Letter of Credit

Despite its importance, SLOC faces several challenges in real-world scenarios. One of the main challenges is the lack of trust in the guarantee, which is often influenced by the credibility of the company involved. Business actors are often hesitant to use SLOC because of concerns about the company's reputation and the potential risks associated with it. Additionally, the complexity of SLOC procedures and the need for specialized knowledge can also hinder its implementation.

Conclusion

In the context of export-import in Medan Level II municipalities, SLOC as a means of payment guarantees challenges in practice. Business actors are more likely to choose alternative dispute resolution through arbitration institutions rather than relying on SLOC, which are influenced by various factors, including the credibility of the company. Therefore, it is essential for businesses to understand the risks and benefits associated with the use of SLOC in international transactions. With a deeper knowledge of the SLOC mechanism and implementation, it is hoped that business actors can maximize the benefits of this guarantee tool in their export and import activities.

Recommendations

Based on the findings of this study, the following recommendations are made:

Improved understanding of SLOC: Businesses should have a deeper understanding of the SLOC mechanism and its implementation to maximize its benefits.
Enhanced credibility: Companies should focus on building their credibility to increase trust in the SLOC guarantee.
Simplified SLOC procedures: Efforts should be made to simplify SLOC procedures to reduce complexity and increase its adoption.
Alternative dispute resolution: Businesses should consider alternative dispute resolution through arbitration institutions to resolve disputes efficiently.

By implementing these recommendations, businesses can maximize the benefits of SLOC in their export and import activities, reducing the risks associated with payment defaults and ensuring smooth transactions.

Future Research Directions

This study highlights the importance of SLOC in export-import activities, but there are still several areas that require further research. Some potential future research directions include:

Comparative study: A comparative study of SLOC implementation in different countries or regions can provide valuable insights into its effectiveness.
Case studies: In-depth case studies of successful SLOC implementations can provide valuable lessons for businesses.
SLOC and digital trade: The impact of digital trade on SLOC implementation and its benefits should be explored.
SLOC and small and medium-sized enterprises (SMEs): The challenges and benefits of SLOC implementation for SMEs should be investigated.

By exploring these research directions, businesses and policymakers can gain a deeper understanding of the role of SLOC in international trade and its potential to facilitate smooth transactions and minimize risks.
Standby Letter of Credit: Frequently Asked Questions

Understanding the Basics of Standby Letter of Credit

In our previous article, we explored the role of Standby Letter of Credit (SLOC) in export-import activities in Medan Level II Municipality. To further clarify the concept and its implementation, we have compiled a list of frequently asked questions and answers.

Q: What is a Standby Letter of Credit?

A: A Standby Letter of Credit (SLOC) is a form of guarantee that is often used as a "reserve" by the recipient (beneficiary) or bank on behalf of the customer. It provides a safety net for businesses to rely on in case of payment defaults or other unforeseen circumstances.

Q: How does a Standby Letter of Credit work?

A: A SLOC works by providing a guarantee that the buyer's payment will be secured, reducing the risk of non-payment or delayed payment. The bank or financial institution issues a letter of credit on behalf of the customer, which is then used to secure the payment.

Q: What are the benefits of using a Standby Letter of Credit?

A: The benefits of using a SLOC include:

Reduced risk of non-payment or delayed payment
Increased trust and credibility between buyers and sellers
Simplified payment processes
Reduced administrative burdens

Q: What are the challenges of implementing a Standby Letter of Credit?

A: The challenges of implementing a SLOC include:

Complexity of procedures
Need for specialized knowledge
Lack of trust in the guarantee
Potential risks associated with the guarantee

Q: How can businesses maximize the benefits of a Standby Letter of Credit?

A: Businesses can maximize the benefits of a SLOC by:

Having a deeper understanding of the SLOC mechanism and its implementation
Building their credibility to increase trust in the SLOC guarantee
Simplifying SLOC procedures to reduce complexity and increase adoption
Considering alternative dispute resolution through arbitration institutions to resolve disputes efficiently

Q: What are the differences between a Standby Letter of Credit and a Letter of Credit?

A: A Standby Letter of Credit (SLOC) and a Letter of Credit (LOC) are both forms of guarantees, but they serve different purposes. A LOC is used to secure payment for a specific transaction, while a SLOC is used as a "reserve" to secure payment in case of payment defaults or other unforeseen circumstances.

Q: Can a Standby Letter of Credit be used for international trade?

A: Yes, a SLOC can be used for international trade. In fact, it is often used in international trade to secure payment and reduce the risk of non-payment or delayed payment.

Q: How can businesses ensure that their Standby Letter of Credit is effective?

A: Businesses can ensure that their SLOC is effective by:

Having a clear understanding of the SLOC mechanism and its implementation
Ensuring that the SLOC is properly issued and confirmed
Verifying that the SLOC is properly used and executed
Monitoring the SLOC to ensure that it is functioning as intended

By understanding the basics of Standby Letter of Credit and its implementation, businesses can maximize the benefits of this guarantee tool in their export and import activities.