Also sometimes referred to as a standby credit. An instrument typically issued by a bank which undertakes to pay one party to a contract (the beneficiary) when the other party has failed, or is alleged to have failed, to perform an obligation under the contract. The beneficiary is usually a purchaser of goods or services. A standby letter of credit is normally payable simply on the beneficiary's presentation of a written demand.

The issuer's undertaking to pay creates a primary obligation, which is therefore independent of the underlying contract. A standby letter of credit is therefore similar to an on demand bond, and differs from a true guarantee (which is a contract of suretyship), as the obligation of a guarantor to make payment under a true guarantee is a secondary obligation and is therefore dependent on the primary obligor being in breach of the underlying contract.

For more information on standby letters of credit, see Practice note, Bonds, guarantees and standby credits: overview: Standby letters of credit.