What is one of the key functions of standby letters of credit?

Standby letters of credit primarily serve as a guarantee for future obligations. They are often used in situations where a borrower needs to provide assurance to a lender or a counterparty that a financial obligation will be met. Essentially, if the borrower fails to fulfill the obligation, the issuer of the letter of credit is required to step in and cover the payment. This function is crucial in various transactions, as it mitigates the risk for the party relying on the letter of credit, allowing them to proceed with transactions and agreements with greater confidence. This security enhances trust and can facilitate various business operations, particularly in international trade and larger contracts.