Standby letters of credit and demand guarantees do the same job, differing mainly in rules and vocabulary
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Both are bank promises that pay out when the other side defaults and a correct demand arrives. A standby usually runs under ISP98 rules, and a demand guarantee under URDG 758.
Terms like this have a quick explainer. Tap or hover on them.
01 · Same function
Both instruments pay the beneficiary when the applicant fails to pay or perform
A , or SBLC, is a backup. It is not meant to pay for the goods. The seller draws on it only if the buyer defaults on the contract, for example by not paying. That is how the US International Trade Administration (ITA) describes it in its Trade Finance Guide.
The ICC Academy calls a standby a secondary obligation. It covers default only. If all goes well, nobody calls on it.
A works the same way. It is a promise by a , usually a bank, that cannot be withdrawn. The guarantor pays the , the party protected, when it receives a . That is a demand that meets the guarantee's terms. This definition comes from the ICC Academy.
A guarantee can back almost any promise in a contract. The ICC Guide to URDG 758 lists payment and performance, from a tender guarantee at the bidding stage to a warranty guarantee after delivery.
The United Nations treats the two as one family. Its 1995 Convention on Independent Guarantees and Stand-by Letters of Credit covers both under one name: an independent undertaking. Independent means the bank's duty to pay does not depend on the underlying deal being valid. The undertaking also cannot be withdrawn once issued, unless it says it can.
The walkthrough below shows the two side by side, from issue to payment.
Figure 1 · Interactive
How a standby and a guarantee are issued and called
Tap an instrument to walk from issuance to payment on a demand.
Sources: US International Trade Administration, Trade Finance Guide 2022; FDIC, RMS Manual section 3.8; 12 CFR 7.1016; UN Convention on Independent Guarantees and Stand-by Letters of Credit (1995); ICC Academy, URDG 758 guide; ICC, Guide to URDG 758.
02 · Different rulebooks
ISP98 grew from US standby practice and URDG from guarantee practice, and either can serve both
The real difference is the rulebook each one names. A standby usually follows , the International Standby Practices. ISP98 took effect on January 1, 1999, according to the Institute of International Banking Law and Practice (IIBLP). It was written under the IIBLP and published as ICC Publication No. 590. Both the ICC and UNCITRAL, the UN's trade law body, endorse it.
ISP98 has not been revised since it was created in 1998, as of January 2024, according to Documentary Credit World. The IIBLP notes that ISP98 can also be used for demand guarantees. Some standbys use UCP, the rules for ordinary letters of credit. The IIBLP says care is needed there, because UCP was designed for commercial credits.
A demand guarantee usually follows , the ICC's Uniform Rules for Demand Guarantees. The ICC put them into effect on July 1, 2010. The first URDG came in 1991, and UNCITRAL endorsed URDG 758 in 2011, according to the ICC store page. The rules have 35 articles. The 2010 revision brought in fixed deadlines for checking a demand, in place of a "reasonable time."
URDG applies only when the guarantee says so. The ICC Guide to URDG 758 lists the conditions. The guarantee must be signed, for money, for a set or maximum amount, paid against documents, meant for default only, and expressly subject to URDG.
US banks have their own rule. Under 12 CFR 7.1016, national banks can issue independent undertakings. The rule names ISP98, UCP 600 and the 1995 UN Convention among the rules of practice it recognizes.
Figure 2
Standby and demand guarantee, side by side
Read across a row to compare the two instruments.
Sources: IIBLP, ISP98 page; ICC, URDG 758 product page and Guide to URDG 758; UN Convention (1995); 12 CFR 7.1016; ICC Academy.
03 · The demand
The bank pays on documents, not on the facts of the dispute
The bank looks only at the papers in front of it. A demand must match the terms of the undertaking, says the UN Convention. For US national banks, the duty to pay depends on the documents the undertaking lists. Conditions that cannot be shown by a document do not count, under 12 CFR 7.1016.
URDG 758 adds two steps, as the ICC Guide explains. First, under article 15, the beneficiary sends a . It says how the applicant broke the contract. Second, under article 20, the guarantor has five business days to decide if the demand complies. If it misses that deadline, it loses the right to refuse.
A bank may hold back payment only in narrow cases. The UN Convention allows it when it is manifest and clear, meaning plain to see, that no payment is due. Other such cases are a document that is not genuine or a demand with no conceivable basis. The bank must act in good faith.
Courts hold to this line. In NIDCO v Banco Santander, standbys of about US$38 million backed work on a highway project in Trinidad and Tobago. The Court of Appeal of England and Wales upheld judgment for the beneficiary. It said fraud must be shown by particularly cogent, or convincing, evidence.
"It cannot be fraudulent to make a demand one is entitled to make."
Court of Appeal of England and Wales, NIDCO v Banco Santander [2017] EWCA Civ 27, January 26, 2017
Both instruments share this logic, as the ICC Academy notes: "Standby credits are very similar to demand guarantees." The main differences are terminology and practice.
04 · Who carries what
The applicant carries the risk of a demand it disputes, and the bank carries the applicant
When the bank pays, the applicant pays the bank back. The is the party that asked for the standby, often the buyer. It signs a separate with the bank, a promise to repay anything the bank pays out. This is set out in the FDIC's examination manual.
So the bank's main risk is the applicant. The FDIC names two primary risks for the issuing bank. One is credit risk, the chance the applicant cannot repay. The other is funding risk, the need to find the cash to pay a demand.
The applicant carries a different risk. It may face a demand it thinks is wrong. The guarantee stands apart from the contract between applicant and beneficiary, says the ICC Academy. Letters of credit follow the same . Any dispute about the contract is settled between the two parties, apart from the bank's payment.
A worked example shows the money. Take a US$1,000,000 standby with a 1.00% annual fee for 360 days. The fee is US$10,000. Say the beneficiary draws US$250,000 after a default. The bank pays US$250,000, and the applicant repays US$250,000. US$750,000 of the standby stays undrawn. These figures are illustrative.
Standbys come in two broad kinds. The FDIC describes financial standbys, which back a payment, and performance standbys, which back a service or task. Exporters often post standbys in favor of importers, the ITA says. They serve as bid bonds, which back a tender offer, as performance bonds, and as .
A pays if the seller fails to perform a non-money promise, such as delivering on time. The ICC tracks how often these are called. Default rates on performance guarantees rose marginally in 2024 compared with 2023, the ICC Academy reports on the ICC Trade Register 2025. The ICC's market commentary notes that the exact default rates are available to buyers of the report only. From 2026 the report is called the ICC Global Trade Intelligence Report.
05 · Structures and support
Guarantees can run direct or through a counter-guarantor, and export credit agencies can share the exposure
A guarantee can involve three parties or four. In the direct form, the applicant's guarantor issues the guarantee straight to the beneficiary. In the four-party form, a second bank steps in, as the ICC Guide to URDG 758 describes. On the applicant's instructions, a counter-guarantor asks a guarantor to issue the guarantee. The counter-guarantor then backs that guarantor with a . The guarantor may also name an advising party to pass the guarantee to the beneficiary, per the ICC Academy.
Courts read the wording, whatever the label. English law has a rule of thumb called the . A bank's cross-border promise to pay on demand, with no clauses letting the bank argue the facts, will almost always be read as a demand guarantee.
The Court of Appeal applied it in Wuhan Guoyu Logistics v Emporiki Bank of Greece. The bank issued a Payment Guarantee on December 14, 2007. It backed the second installment of a shipbuilding contract, US$10,312,500.00, payable on first written demand. The court held it was an on demand guarantee.
Governments can share the load. An (ECA) is a state-backed body that supports a country's exports. Under the UK Export Finance Bond Support Scheme, UKEF guarantees up to 80% of a bond's value to the exporter's bank. The scheme covers bid, advance payment, performance, retention and warranty bonds. UKEF says the benefit is less cash tied up as collateral to secure the bond.
One small firm shows how this works. UKEF underwrote 80 percent of bond guarantees that Lloyds issued for Vapormatt, a manufacturer in Somerset, England. The UKEF case study of August 4, 2020 reports turnover growth of 30 to 40 percent.
The calculator below shows the sums on a performance guarantee. It counts the fee on a 360-day year. That is the standard US money market , as used by the ARRC and the Federal Reserve.
Figure 3 · Try it
What a performance guarantee ties up, with and without ECA support
Set the contract value, the guarantee percentage and the term. The result shows the guarantee amount, the fee and the share an ECA cover takes.
Guarantee, percent of contract (illustrative)
Annual guarantee fee (illustrative)
Days to expiry
ECA cover
Guarantee amount
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Fee over the guarantee's life
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Share the ECA cover takes
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Formula: guarantee = contract x percentage; fee = guarantee x annual fee x days / 360; ECA share = guarantee x cover; bank retained = guarantee minus ECA share.
Our Research Desk used simple fee accrual on a 360-day year. The 80% cover is the UKEF Bond Support Scheme maximum. Fees shown are for illustration and are not Ossiano pricing.
This calculator explains the concept only. Actual fees, cover levels and collateral terms vary by bank, agency, contract and applicant.
06 · Ossiano view
The choice between a standby and a guarantee is a choice of rules and market habit
OBSERVATION 01
One function, two vocabularies
The ICC Academy says the main difference between the two is terminology and practice. ISP98 can also be used for demand guarantees. Counterparties can agree on the instrument their banks and courts know best.
OBSERVATION 02
Rules that give certainty on timing
URDG 758 gives the guarantor five business days to decide. US regulation ties a bank's duty to pay to specified documents. Beneficiaries know when an answer is due and what it will rest on.
OBSERVATION 03
Export credit agencies extend capacity
UKEF can guarantee up to 80% of a bond's value to the exporter's bank. That leaves less of the exporter's cash tied up as collateral, so it can take on more contracts.
Summary
A standby and a demand guarantee are two names for one kind of bank promise
A standby letter of credit is a backup the beneficiary draws on only after a default. A demand guarantee is a promise to pay on a complying demand, apart from the underlying contract. The UN Convention treats both as one kind of independent undertaking. The ICC Academy says the main differences are terminology and practice.
Standbys usually follow ISP98, in effect since January 1, 1999. Guarantees usually follow URDG 758, in effect since July 1, 2010. In both, the bank pays on documents and the applicant repays the bank.
Related guides: letters of credit, open account trade, buyer, country and performance risk, trade credit insurance and fraud controls in trade finance. Instrument cards: standby letter of credit, demand guarantee (bank guarantee), ECA-backed finance and confirmed letter of credit. Every term is defined in the Trade Finance Glossary.
For questions on how these shifts affect existing or planned trade finance exposures, contact the Ossiano Research Desk.
Sources
- US International Trade Administration, Trade Finance Guide: A Quick Reference for US Exporters, 2022. Supports: standby LC definition and use on default; standbys as bid bonds, performance bonds and advance payment guarantees; standby supporting open account terms.
- ICC Academy, Types of documentary credit: a comprehensive guide (Dave Meynell), October 21, 2024. Supports: standbys very similar to demand guarantees, differing in terminology and practice; standby as a secondary obligation covering default only.
- ICC Academy, Understanding demand guarantees: URDG 758 guide (Miguel Angel Bustamante), June 3, 2026. Supports: demand guarantee definition; guarantor and counter-guarantor roles; independence from the underlying contract; advising party.
- International Chamber of Commerce (ICC Digital Library), Guide to ICC Uniform Rules for Demand Guarantees URDG 758 (Affaki and Goode), Chapter 2, 2011. Supports: conditions for URDG to apply (para 65); scope from tender to warranty guarantees (para 66); supporting statement under article 15 (para 93); five business days to examine under article 20 (para 92); expiry (para 77); four-party structure (para 31).
- UNCITRAL (United Nations), United Nations Convention on Independent Guarantees and Stand-by Letters of Credit, December 11, 1995. Supports: one class of independent undertaking (article 2); independence (article 3); irrevocable on issuance (article 7(4)); demand in conformity (article 15); manifest and clear exceptions (article 19(1)).
- Institute of International Banking Law and Practice, ISP98 page, undated. Supports: ISP98 effective January 1, 1999; ICC Publication No. 590, endorsed by ICC and UNCITRAL; use for demand guarantees; care needed when using UCP for standbys.
- ICC Digital Library (Documentary Credit World), International Standby Practices ISP98: 25 Years (Pavel Andrle), January 2024. Supports: ISP98 not revised since its creation in 1998.
- International Chamber of Commerce, New rules for demand guarantees effective 1 July, June 30, 2010. Supports: URDG 758 effective July 1, 2010.
- International Chamber of Commerce, Uniform Rules for Demand Guarantees URDG, 2010 revision (ICC Knowledge 2 Go), undated. Supports: first URDG in 1991; UNCITRAL endorsement in 2011; 35 articles and fixed examination periods.
- US Office of the Comptroller of the Currency via eCFR, 12 CFR 7.1016 Independent undertakings to pay against documents, September 17, 2026. Supports: duty to honor depends on specified documents (7.1016(a)); ISP98, UCP 600 and the UN Convention among recognized rules of practice (footnote 1).
- Federal Deposit Insurance Corporation, RMS Manual of Examination Policies, Section 3.8 Off-Balance Sheet Activities, June 2019. Supports: financial and performance standbys; separate reimbursement agreement; credit and funding risk for the issuing bank.
- Court of Appeal of England and Wales, NIDCO v Banco Santander SA [2017] EWCA Civ 27, January 26, 2017. Supports: standbys of about US$38 million; summary judgment for the beneficiary upheld; quote at para 33.
- Court of Appeal of England and Wales, Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece SA [2012] EWCA Civ 1629, December 7, 2012. Supports: Paget presumption (para 26); Payment Guarantee issued December 14, 2007 (para 11); US$10,312,500.00 installment on first written demand (para 12); held an on demand guarantee (para 33).
- ICC Academy, ICC Trade Register 2025, December 17, 2025. Supports: performance guarantee default rates rose marginally in 2024 versus 2023.
- International Chamber of Commerce, ICC Market Commentary, Trade Register 2025, October 2025. Supports: numerical default rates available to report buyers only.
- International Chamber of Commerce, ICC Global Trade Intelligence Report 2026, September 17, 2026. Supports: the Trade Register renamed from the 2026 edition.
- UK Export Finance, Bond Support Scheme, February 23, 2026. Supports: guarantee of up to 80% of a bond's value; bond types covered; less cash tied up as collateral.
- UK Export Finance via GOV.UK, Case study: Bridgwater exporter increases turnover following UKEF support, August 4, 2020. Supports: UKEF underwrote 80 percent of Lloyds bond guarantees for Vapormatt; turnover growth of 30 to 40 percent.
- Alternative Reference Rates Committee, SOFR "In Arrears" Conventions for Syndicated Business Loans, July 22, 2020. Supports: Actual/360 as the standard US money market day count, used in Figure 3.
- Board of Governors of the Federal Reserve System, Selected Interest Rates (Daily), H.15, September 29, 2026. Supports: money market rates annualized on a 360-day year, used in Figure 3.
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