Standby Letter of Credit
A standby letter of credit (SBLC) is a guarantee of payment issued by a bank on behalf of a client that is used as “payment of last resort” should the client fail to fulfill a contractual commitment with a third party.
Standby letters of credit are created as a sign of good faith in business transactions and are proof of a buyers’ credit quality and repayment abilities.
The institution issuing the SBLC performs compliance and brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then sends notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Importantly, when requesting a SBLC, a business owner proves to the bank he is capable of repaying the loan. Collateral such as promissory notes, post-dated cheques and Escrow deposits will be required to protect the bank in case of default. The business owner must pay a SBLC fee for each year that the letter is valid. The negotiable fee is typically 5-10% of the SBLC value.
Standby Letters of Credit (SBLC) provide an essential layer of security in complex commercial transactions by guaranteeing compensation to the beneficiary if the client fails to meet contractual commitments. This assurance is critical in reducing the risks associated with non-performance, default, or financial uncertainties. By having an SBLC in place, businesses can confidently enter into agreements, knowing that their financial interests are protected. This protection extends to both domestic and international transactions, making SBLCs a versatile tool in mitigating financial risks.
Facilitating Trade
Standby LCs play a crucial role in facilitating international trade by fostering trust among partners operating under different legal systems. By ensuring timely payment to suppliers, contractors, or service providers, SBLCs help bridge the gap between diverse legal and financial frameworks. This assurance of payment allows businesses to expand their operations and explore new markets with greater confidence. As a result, companies can build stronger, more reliable partnerships across borders, enhancing their global presence.
Alternative to Cash Deposits
SBLCs offer a valuable alternative to traditional cash deposits or collateral requirements, providing companies with the flexibility to secure financial assurance without tying up significant capital. This flexibility allows businesses to allocate their financial resources more efficiently, investing in other critical areas of their operations. By freeing up capital that would otherwise be locked in deposits, companies can pursue growth opportunities and enhance their competitive edge.
Credit Enhancement
For small and medium-sized enterprises (SMEs), SBLCs can significantly enhance creditworthiness by providing a reliable payment guarantee to creditors or suppliers. This assurance can lead to more favorable credit terms, as suppliers and lenders gain confidence in the SME’s ability to meet its financial obligations. Enhanced creditworthiness can also open doors to new financing opportunities, enabling SMEs to secure the capital needed for expansion and innovation.
General procedure
- Applicant sends us underlying contract (Ex: Sales Contract / pro-forma invoice).
- We will create a draft instrument and send a quote with our charges (to be paid in advance).
- Once the draft has been accepted, we send the indemnity (KYC/AML/due diligence) documents which need to be signed and notarised by a lawyer.
- We also send you a formal invoice for our indemnity process and issuance charges.
- Once we receive our charges and all DD checks are completed and approved, along with all indemnity documents, we will SWIFT the instrument to the beneficiary’s bank immediately.
- Beneficiary is paid at least 14 days before the expiry date (Up to 2 years from SBLC issue date).
