Letter of credit terminology can be confusing because certain terms are often used interchangeably. Essentially, there are two types of letters of credit: merchandise and stand-by letters of credit. A merchandise letter of credit is a payment mechanism whereby a bank substitutes it's credit for the buyer’s credit in an international trade transaction. It is also called a trade or commercial letter of credit and can be domestic or cross border (import or export).
A standby letter of credit is a passive payment instrument that is designed to protect cash flow, not speed it up. It is most often designed to be drawn upon in the event of default or non-performance by the account party/applicant. A standby is also known as a backup, bid, guarantee, performance or security letter of credit.