In general, there are two types of letters of credit: Commercial and Standby. The purpose of both types of letters of credit is to replace the creditworthiness of the buyer with that of the issuing bank. A Letter of Credit is a document issued by a bank or other financial institution for the account of the buyer (known as the Applicant) to pay the Beneficiary the value of the draft and/or documents provided that the terms and conditions of the Documentary Credit are complied with. It is important to remember that the Documentary Credit assures payment on the basis of documents alone and not based on the goods or services to which it may refer. The Standby Letter of Credit serves as a back-up or secondary means of payment in the event of a default by the Applicant, whereas a Commercial Letter of Credit is activated by the performance of the Beneficiary (i.e., goods being shipped by the Beneficiary).