A Standby Letter of Credit (called“SLC or “LC” ) are written obligations of an issuing bank to pay a sum of money to a beneficiary on behalf of their customer in the event that the customer does not pay the beneficiary. It is important to note that standby letters of credit apply only whenever the issuing bank's commitment to pay is not contingent on the existence, validity and enforceability of it’s customer’s obligation; this is called an “abstract” guarantee; that is, the bank’s obligation is to pay regardless of any disputes between its customer and the beneficiary.
The standby basically fulfills the same purpose as a bank guarantee: it is payable upon first demand and without objections or defenses on the basis of the underlying transaction between the applicant and the beneficiary. It is up to the beneficiary to decide whether he may accept a standby. They are simple to obtain from your bank so long as you have the nessassary funds in your account.
Your bank encumbers your account (puts a hold on the funds) for the amount of the the letter. Upon receipt of the goods you release the funds to the supplier. So, if you don’t have the funds now, you’re out of luck unless you do borrow them.