Standby Letters of Credit (SBLCs) are financial instruments that guarantee payment for a particular transaction. These instruments are issued by banks and financial institutions and are commonly used in international trade to assure the seller that they will be paid for goods or services delivered to the buyer or are used to enhance the company's credit facilities.
1.SBLC Monetization Companies: SBLC Monetization Companies are financial service providers that offer monetization services for Standby Letters of Credit. These companies help clients unlock the value of their SBLCs by converting them into cash. In essence, SBLC monetization converts a non-cash financial instrument (SBLC) into cash.
An analogy to understand SBLC Monetization is like a pawnshop. Just as a pawnshop takes valuable items and provides cash in exchange, an SBLC monetization company takes SBLCs and provides cash in exchange.
We at AltFunds Global were recently invited to monetize a $500 million leased SBLC. The client wants a loan upon issuing the SBLC to use. We (AltFunds) agreed to do so. Thus, AltFunds Global is one of the many SBLC Monetization Companies.
2.SBLC Lease Agreement & Leased SBLC Monetization: An SBLC Lease Agreement is an agreement between two parties where one party (the lessee) leases an SBLC from the other party (the lessor) for a specific period. The lessee pays a fee to the lessor for the use of the SBLC during the lease period. At the end of the lease period, the SBLC is returned to the lessor.
An analogy to understand SBLC Lease Agreement is like leasing a car. Just as a person can lease a car for a specific period by paying a fee to the lessor, a person can lease an SBLC for a specific time by paying a fee to the lessor.
Here at AltFunds Global, we do this for ourselves and some of our VIP clients/friends, where together we lease an instrument and provide it to a monetizer and take a delta (cash out). The process is certainly not easy and requires banking relationships that the average company wouldn't have.
3.Standby Letter of Credit Financing or SBLC Funding: Standby Letter of Credit Financing is a type of financing where a borrower uses an SBLC as collateral to obtain a loan from a lender. The lender provides the borrower with funds based on the value of the SBLC. If the borrower fails to repay the loan, the lender can draw on the SBLC to recover the loan amount.
An analogy to understand a Standby Letter of Credit Financing is like a mortgage. Just as a person can use their home as collateral to obtain a mortgage, a borrower can use an SBLC to obtain financing.
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Many European & African banks like HSBC provide these types of loans where they will accept your instrument in exchange for loans.
4.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.
To help illustrate this concept, let's use an analogy. Imagine you have a valuable watch, but you need cash urgently. You decide to sell the watch to a pawnshop at a discount. The pawnshop becomes the new owner of the watch and takes on the risk of not being able to sell it for the total value. In return, you receive immediate cash, which you can use to meet your urgent needs.
Similarly, SBLC Discounting allows the applicant to receive immediate cash by selling the SBLC at a discount to a third party. The third party takes on the risk of the applicant defaulting on their obligation, while the applicant receives cash that they can use for their business or personal needs.
In conclusion, SBLCs are used every day by businesses worldwide for various reasons such as collateral, receiving a loan, line of credit or simply as a vehicle to access a non-recourse loan.
If you would like to learn more about SBLCs and how they can benefit your business, please book a consultation call with us at www.altfundsglobal.com
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