SBLC/SLOC

What is a Standby Letter of Credit (SBLC / SLOC)?

A standby letter of credit (SBLC/SLOC) is a guarantee of payment by a bank on behalf of their client. It is a loan of last resort in which the bank fulfills payment obligations by the end of the contract if their client cannot. A standby letter of credit is different from a bank guarantee. A standby letter of credit can also be abbreviated SBLC or SLOC.

General Credit Finance and Development Limited (GCFDL) is a certified sblc provider with decades of experience and credibility.

Types of Standby Letter of Credit (SBLC/SLOC)

Financial standby LOC: An exporter sells goods to a foreign buyer, who promises to pay within 60 days. If the payment never arrives (and the exporter required the buyer to use a standby letter of credit) the exporter can collect payment from the importer’s bank. Before issuing the letter of credit, the bank typically evaluates the importer’s credit and determines that the importer will repay the bank. But if the customer’s credit is in question, banks may require collateral (or funds on deposit) for approval.

Performance standby LOC: A contractor agrees to complete a construction project within a certain timeframe. When the deadline arrives, the project is not complete. With a standby letter of credit in place, the contractor’s customer can demand payment from the contractor’s bank. That payment functions as a penalty to encourage on-time completion, funding to bring in another contractor to take over mid-project, or compensation for the headaches of dealing with problems. This is an example of a “performance” standby letter of credit, and a failure to perform triggers the payment.

SBLC is foreign trade, facilitated by General Credit Finance and Development Limited, one of the leading standby letters of credit providers.

Advantages of a Standby Letter of Credit (SBLC / SLOC)

An SBLC helps ensure that the buyer will receive the goods or service that’s outlined in the document. 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.

Also, small businesses can have difficulty competing against bigger and better-known rivals. An SBLC can add credibility to its bid for a project and can often times help avoid an upfront payment to the seller.

The SBLC / SLOC is often seen in contracts involving international trade, which tend to involve a large commitment of money and have added risks.

For the business that is presented with a SLOC/SBLC, the greatest advantage is the potential ease of getting out of that worst-case scenario. If an agreement calls for payment within 30 days of delivery and the payment is not made, the seller can present the SLOC to the buyer’s bank for payment. Thus, the seller is guaranteed to be paid. Another advantage for the seller is that the SBLC reduces the risk of the production order being changed or canceled by the buyer.

Uses Of Standby Letters of Credit (SBLC / SLOC)

A standby letter of credit helps facilitate international trade between companies that don’t know each other and have different laws and regulations. Although the buyer is certain to receive the goods and the seller certain to receive payment, a SLOC doesn’t guarantee the buyer will be happy with the goods.   A standby letter of credit is most often sought by a business to help it obtain a contract. The contract is a “standby” agreement because the bank will have to pay only in a worst-case scenario. Although an sblc/sloc guarantees payment to a seller, the agreement must be followed exactly. For example, a delay in shipping or a misspelling a company’s name can lead to the bank refusing to make the payment. There are two main types of standby letters of credit:A financial sblc/sloc guarantees payment for goods or services as specified by an agreement. An oil refining company, for example, might arrange for such a letter to reassure a seller of crude oil that it can pay for a huge delivery of crude oil. Standby letters of credit can help establish trust with your business partners and be a powerful tool to help meet your business goals.

What Is The Difference Between Letter of Credit (LC) and Standby Letter of Credit (SBLC)?

The Difference between LC and SBLCis as follows.
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade, where the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as an underwriter, where it assumes the counterparty risk of the buyer paying the seller for goods. The Standby Letter Of Credit (SBLC) is governed by a set of guidelines known as the Uniform Customs and Practice (UCP 600), which was first created in the 1930s by the International Chamber of Commerce (ICC).

So What Is The Key difference: The ‘Letter of Credit’ and the ‘Standby Letter of Credit’ are two legal bank documents that are used by international traders. Both these letters are used to ensure the financial safety between the supplier and their buyers.

And, SBLC is a type of LC that is used when there is a contingent upon the performance of the buyer and this letter is available with the seller to prove the buyer’s non-performance during the sale.

LC and SLBC are the two financial instruments that are meant to safeguard the financial interests of the international traders i.e. buyers and sellers. It simply means that both these terms are widely useful while making transaction between the two trading parties. These help in giving financial security to both the parties. Also, these contracts are produced in good faith and in both the cases the fund gets mobilized.

During a transaction, the buyer wants an assurance of receiving his product or merchandise on time, and the seller wants his security of being paid on time at the completion of the job. Here, a letter of credit is issued, for it is an assurance or a type of guarantee that the seller will receive his correct payments in time by the clients. The LC solves both the issues by bringing in the buyer’s and seller’s banks into the transaction.

The issuing bank of the buyer, then, opens a LC in the favor of the seller and states that seller will be paid and that he or she will not suffer any damages or losses because of the non-payment of the buyer. Though, the money transfer to the seller will only be initiated after all the conditions or documents of the contract are completed. However, the bank also safeguards the interest of the buyer by not paying the supplier until it receives a confirmation from the supplier that the goods have been shipped.

Based on this, there are two types of LCs being issued, they are:

Documentary Letter of Credit (DLC) and Stand By Letter of Credit (SBLC)
Now, the DLC depends on the performance by the supplier, whereas SBLC depends on the non-performance or default on the part of the buyer.

A SBLC works on the same principle as a documentary letter of credit but with different objectives and required documents. The essence of SBLC is that the issuing bank will perform in the case of non performance or default by the buyer.

The purpose of this letter is to establish a bank guarantee for the deal or transaction with a third party. For example, if an individual wishes to take a loan, but does not have a sufficient credit standing, the bank may then ask for a guarantee from another party (third party), and this is done in the form of a standby letter of credit that is issued by another bank. However, the said individual would then have to produce certain documents or evidence to support the non-performance of the buyer to obtain the payment through the SBLC.

The bank is obligated to make payment if the documents presented comply with the terms of contract. Though, the SBLC are considered very versatile and can be used with modifications to suit the interests and requirements of the buyers and sellers.

What is the difference between a Bank Guarantee and SBLC?

Bank Guarantee (BG): A Bank Guarantee is a promise made by a bank on behalf of a client, ensuring that the bank will cover a specific amount if the client fails to fulfill their contractual obligations. It acts as a safety net for the beneficiary (the party receiving the guarantee), providing assurance that the bank will step in to make payment if the principal (the party seeking the guarantee) defaults.

Standby Letter of Credit (SBLC): A Standby Letter of Credit is a financial instrument issued by a bank to serve as a backup payment mechanism. It is essentially a guarantee that the bank will pay the beneficiary if the applicant (the party requesting the SBLC) fails to meet their obligations under the terms of the underlying contract. The SBLC is used primarily to secure payment in the event of non-performance or default, functioning as a safety net similar to the BG but with some different features.

Usage and Common Practice

  • BG: Typically used for domestic transactions and guarantees related to performance, such as construction or service contracts. For instance, a contractor might use a BG to assure a project owner of their commitment.
  • SBLC: Predominantly used in international trade and large-scale transactions. It’s common in situations where the buyer’s creditworthiness is a concern, ensuring the seller receives payment even if the buyer defaults.

Nature of the Commitment

  • BG: The bank’s obligation under a BG is contingent on the occurrence of specific events outlined in the guarantee, such as default or non-performance. Payment is often made without requiring documentary proof.
  • SBLC: An SBLC requires the presentation of specific documents to trigger payment. These documents might include evidence of default or non-performance, adhering to international practices like UCP 600 or ISP 98.

Document Presentation

  • BG: Typically does not require the presentation of documents for payment. The bank pays based on the occurrence of a default or other specified events.
  • SBLC: Payment is made upon presentation of documents that prove the applicant’s failure to meet obligations, such as invoices or shipping documents.

Legal Framework and Regulation

  • BG: Governed by local laws and regulations, which can vary significantly between jurisdictions. The specifics of BGs depend on regional practices and legal interpretations.
  • SBLC: Governed by international rules like ISP 98 or UCP 600, providing a standardized legal and procedural framework that facilitates international transactions and reduces ambiguity.

Financial Implications

  • BG: Generally incurs lower fees. Costs may include a one-time fee or a percentage of the guaranteed amount, depending on the bank’s policies.
  • SBLC: Typically more expensive due to documentary requirements and the complexity of the process. Fees are charged for issuance, amendments, and confirmations.

Summary

  • A standby letter of credit (SBLC) refers to a legal instrument issued by a bank on behalf of its client, providing a guarantee of its commitment to pay the seller if its client (the buyer) defaults on the agreement.
  • An SBLC is frequently  used in international and domestic transactions where the parties to a contract do not know each other.
  • A standby letter of credit serves as a safety net by assuring the seller that the bank will make payment for the goods or services delivered if the buyer fails to make the payment on time.

SBLC Providers- Who Are They?

SBLC provider is a bank or financial institution like General Credit Finance and Development Limited that issues Standby Letters of Credit (SBLC) and other bank instruments for customers.  SBLC providers help clients secure loans and project financing from banks, activate credit lines, and also trade finance solutions.

What is SBLC Monetization?

Standby Letter of Credit (SBLC) monetization is the process of converting a BG or SBLC into cash or cash equivalents. As already explained, an SBLC is a financial instrument that is issued by a bank and guarantees payment to a beneficiary if the party that obtained the SBLC fails to fulfill a specific obligation.

SBLC monetization has certain rules which must be followed to ensure the monetization process is successful. If a business wishes to monetize a standby letter of credit, the SBLC verbiage must have specific wording specifically for monetization.

Bank guarantee and SBLC monetization are governed by ICC Uniform Rules for Demand Guarantees (URDG 758).

At General Credit Finance and Development Limited (GCFDL), we offer a very simple and straightforward SBLC issuance & Monetization method without involving third parties.

Contact our trade finance specialists to learn more. We offer a free consultation.