SBLC/BG Factsheet | Know Everything About Standby Letter Of Credit & Bank Guarantee | SBLC/BG Providers | Banking | Procedure | Monetizing | Discounting | #trade #trader #trading #finance #fund #loans #credit #capital #assets #fintech #oilandgas #import | (2024)

FAQs

What is SBLC standby letters of credit? ›

A Standby Letter of Credit (SBLC / SLOC) is a guarantee that is made by a bank on behalf of a client, which ensures payment will be made even if their client cannot fulfill the payment. It is a payment of last resort from the bank, and ideally, is never meant to be used.

Standby Letter of Credit (SBLC)/ Bank Guarantee (BG) 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.

A Standby Letter of Credit (SBLC) and Bank Guarantee (BG) is a payment guarantee generally issued by the issuing bank on behalf of an applicant securing payment to the beneficiary, If the buyer fails to fulfil a contractual commitment the issuing bank will release payment to the seller.

Some of the risks include bankruptcy and insufficient cash flows on the part of the buyer, which prevents them from making payments to the seller on time. In case of an adverse event, the bank promises to make the required payment to the seller as long as they meet the requirements of the SBLC.

The primary cost associated with an SBLC is the fee charged by the bank for issuing it. This fee typically ranges from 1% to 10% per year of the SBLC's face value, depending on the bank's assessment of risk. The riskier the client's business proposition or the lower their creditworthiness, the higher the fee.

An SBLC can act as collateral for a loan when a borrower has limited physical assets to pledge. The SBLC assures lenders of payment from the issuing bank should the borrower default.

Standby letters of credit are used in open account trade (goods are shipped and delivered before payment is due), collections, and Documentary Credits (DCs). The bank offers a standby letter of credit on behalf of the importer to guarantee payment to the exporter, in case the importer defaults on the agreement.

SBLC is often considered as a safety mechanism for the buyer and helps in reducing risks associated with the business. Cash backed SBLC is a letter of credit that aims at minimizing the risk, optimizing the profits and maximizing control when a person or association enters into business in an international market.

1-6-6- Disadvantages of the standby letter of credit

Low protection in the event of default. Time constraints. Utilized for a shorter duration. Less frequently used as the documentary credit, thus it can be prone to errors.

Can SBLc be discounted? ›

SBLC Discounting is the process of selling the SBLC to a third party at a discount for immediate cash. The third party becomes the new beneficiary of the SBLC and takes on the risk of the applicant defaulting. The discount is calculated based on the remaining term of the SBLC and the applicant's creditworthiness.

An instrument typically issued by a bank which undertakes to pay one party to a contract (the beneficiary) when the other party has failed, or is alleged to have failed, to perform an obligation under the contract. The beneficiary is usually a purchaser of goods or services.

In general, a written discharge letter from the Beneficiary together with the return of the original SBLC is required for cancellation of SBLC prior to its expiry date.

Documentation Requirements

Business Financial Statements: Provide recent financial statements, including balance sheets and income statements, to demonstrate financial health. Trade Contract or Agreement: Submit a copy of the trade agreement or contract necessitating the SBLC, highlighting terms and obligations.

If the buyer meets its obligations in the contract before the due date, the bank will terminate the SBLC without a further charge to the buyer. Once the buyer pays the seller for the goods or the services, the bank terminates the SBLC and doesn't charge him beyond that point.

An LC is used as the main way to make payments, making sure the seller gets paid once they fulfill their part of the deal. An SBLC, on the other hand, acts as a safety net and is used if there's a risk that the buyer might not fulfill their part of the deal.

The beneficiary is usually a purchaser of goods or services. A standby letter of credit is normally payable simply on the beneficiary's presentation of a written demand. The issuer's undertaking to pay creates a primary obligation, which is therefore independent of the underlying contract.

Standby Letter of Credit (LC)

The Importer arranges for their bank to provide the Exporter with a Guarantee that, in the event that goods have been shipped and the Exporter has not been paid, the Importer's bank will guarantee payment for a pre-determined amount.

For example, if a contract calls for the construction of a building and the builder fails to deliver, the client presents the SLOC to the bank to be made whole. Another advantage when involved in global trade, a buyer has an increased certainty that the goods will be delivered from the seller.