Standby letters of credit were first developed in the US to get round the inability of US banks to issue guarantees. Outside of the US, it is more common to use an on demand guarantee or bond (see Practice Note: On demand guarantees and bonds) rather than a Standby letter of credit.

Standby letters of credit are a type of Letter of Credit.

The common feature of all letters of credit is an undertaking by a bank to pay the Beneficiary of the letter of credit a specific sum within a specified time limit against the presentation of specific documents in accordance with the terms of the letter of credit.

Letters of credit can be either:

1. •

   commercial letters of credit (also known as traditional letters of credit), or

2. •

   standby letters of credit (also known as standby credits)

The purpose of a letter of credit determines which category it falls into.