SBLC means Standby Letter of Credit (SBLC), a form of a letter of credit (LC) in which the issuing bank agrees to pay the recipient if the applicant fails to make the payment. A Standby Letter of Credit (SBLC) is a bank guarantee for a specific payment to a seller if the buyer delays or fails to complete the payment. SBLC is a legal document in banking, and the payment given by the bank to the seller is in the form of credit. The buyer must repay the credit with interest as previously negotiated with the bank.
If the buyer and seller are unfamiliar with each other and want to cut any risks, standby LC is used during international or domestic transactions between two parties. It protects against risks such as buyer insolvency and insufficient cash flow, which disrupts the flow of payments to the seller.
What is SBLC?
A standby letter of credit (SBLC) is a legal document that ensures a bank’s duty to compensate a seller in the event that the buyer or the bank’s customer fails to uphold the terms of the contract. The acronym SBLC refers to a standby letter of credit. A bank guarantee and a standby letter of credit are two separate things. For instance, the bank can decline to make the payment due to a shipping delay or a misspelling of the firm name.
Standby LC facilitates international transactions between companies that do not know each other and have different laws and regulations. A Standby Letter of Credit (SBLC) may ensure that the buyer receives the goods and that the seller receives payment, but it cannot guarantee that the buyer will be satisfied with them.
Types of Standby Letters of Credit
The two main types of SBLC are:
The SBLC guarantees payment for products or services as specified in the agreement. For example, if crude oil is supplied to a foreign buyer with the expectation that the buyer will pay within 30 days of shipping, and the payment is not made by the requisite date, the crude oil seller can recover payment from the buyer’s bank. The bank will collect the principal plus interest from the buyer because it is a credit.
Performance Based SBLC
SBLCs ensure that projects are completed within the required timeframes. The bank guarantees to reimburse the third party a certain amount upon the client’s inability to complete the project described in the contract. Projects requiring a specific time frame, such as construction projects, use performance-based SBLCs. In the case of project delays, this payment is used to reimburse the client or hire another contractor to complete the work.
Benefits of SBLC Financing
Bridges Trust Deficit
One of the primary reasons for the failure of some international commerce partnerships is a lack of confidence and fear of payment default. An SBLC is the most effective technique to bridge the gap and address all worst-case scenarios.
Serves as an excellent indication of creditworthiness
When a reputable financial institution extends a standby letter of credit to someone, they effectively make a statement about their and their company’s financial status. This contribution is significant to creditworthiness.
Helps with business acquisition
Businesses that are getting started may need help to secure large projects because they need a legacy. Companies frequently become hesitant to cooperate with such persons or businesses. With the help of SBLC, the company has the backing of a reputable financial institution, allowing it to compete successfully for prestigious contracts and large-scale projects.
Difference between LC vs SBLC
A SBLC differs from a letter of credit. SBLC is paid if certain conditions are not met. But, if certain specifications are met and goods are received from the selling party, the letter of credit guarantees payment. Both SBLC and LC are means of payment used in international trade.
With a letter of credit, the bank guarantees that the importer or buyer will fulfil their payment commitments and pay the invoice in full and on schedule.
A letter of credit is an assurance or guarantee that the seller will receive his correct payments in time from the clients. In contrast, a standby letter of credit provides an assurance or guarantee that the seller will receive his correct payments from the bank.
There are no requirements that the buyer must follow to conclude a transaction under a letter of credit. It does contain fundamental necessities like paperwork, packing, etc. The buyer must meet specific conditions to use a standby letter of credit may exist.
Purpose of Issue
The objective is to execute the transaction using the letter of credit since it is the primary means of payment. It gives the seller protection and reassurance that the customer will pay for the supply of the products. This is the typical payment document used in a cross-border transaction where neither party is known.
The standard 90-day expiration period for a letter of credit makes it a short-term instrument. A standby letter of credit is a lengthy instrument having a validity of one year or so.
A letter of credit serves as security for a deal, such as a sale contract. It is common practice to utilize a standby letter of credit as security for a long-term obligation, such as a protracted building project.
In an international transaction, a letter of credit is frequently used when the buyer is the importer and the seller is the exporter. Although it is usually utilized in domestic operations, a standby letter of credit is also employed in foreign transactions. Its application is not restricted to any one region.
Cost of Issuance
The cost of a standby letter of credit is more than that of a standard letter of credit. In contrast to a standby letter of credit, which can cover the same amount for anywhere between 1% and 10% of the original amount, standard letters of credit include fees that range from 0.75% to 1.50% of the total amount covered.
Standby letter of credit (SBLC) monetisation transforms a standby letter of credit (SBLC) into money or legal tender. However, the Standby Letter of Credit (SBLC) must be cut or issued by a prime bank; this is critical because Standby Letters of Credit from unrated institutions have little or no value and are difficult to monetise.
SBLC and loans
The process of obtaining an SBLC is similar to that of applying for a loan. The buyer begins the procedure by applying for an SBLC at a commercial bank. Using the previous credit history and the most recent credit report, the bank will do due diligence on the buyer to determine its creditworthiness. If the buyer’s creditworthiness is in doubt, the bank may ask the buyer to submit collateral as an asset or funds on deposit before approval.
The degree of risk, firm strength and the amount secured by the SBLC will all play a role in determining the level of collateral needed. The beneficiary’s bank details, shipping documents needed for payment, and the SBLC’s validity period must all be disclosed by the buyer to the bank.
Managing such a transaction is a unique challenge. With LegaMart, you can talk to attorneys worldwide and get all the information you need about Standby Letters of Credit. LegaMart is a leading legal-tech platform which has 2000+ registered lawyers with them from 160+ countries.
What is done to SBLC if the buyer fulfils the contractual obligation?
The bank will end the SBLC without further fees if the buyer fulfils its contractual obligation before the due date. The seller must deliver all applicable papers specified in the SBLC must be sent by the seller to the buyer’s bank within a specific time frame. If the buyer violates the terms of the contract for any reason, including bankruptcy, cash flow problems, dishonesty, etc., the bank will make the payment owed to the seller’s bank.
SBLC monetisation process
Bank instrument monetisation, as previously defined, is the process of liquidating a Standby Letter of Credit (SBLC) or Bank Guarantee (BG) into cash or legal money.
Standby Letter of Credit (SBLC) Monetization Terms
To monetise a Standby Letter of Credit (SBLC), you must first have the SBLC in your hands and have it confirmed.
To be monetised, the Standby Letter of Credit (SBLC) must be granted by one of the top 25 AAA-rated banks in the United States, Switzerland, Germany, London, or France, such as JP Morgan, HSBC, Citibank, Barclays, Stanchart, and others.
Unrated banks’ standby letters of credit (SBLC) cannot be monetised.
The face value of the Standby Letter of Credit (SBLC) should be greater than $5 million.
The Standby Letter of Credit (SBLC) MUST be valid for at least 11 months before expiry.
Transaction turnaround time of 5 to 10 working days or fewer
Exceptions to the smallest transaction size are possible.
A legally binding agreement is required for brokers and intermediaries.
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Banks rate approximately 1% to 10% as annual prices Of the total SBLC amount relying on the risks and the amount. The costs are relevant so long as the SBLC is valid.
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Stating the difference between a StandBy Letter of Credit and a Guaranty
In many ways, a standby letter of credit resembles a guarantee, but there are several key differences between the two.
Guaranty: A guarantee is a commitment to take responsibility for another person’s debt or default. As a result, the guarantor now has a secondary responsibility that depends on the underlying contract’s non-performance. Once the principal obligor has defaulted or violated, the guarantor can only be asked to perform. Only a factual determination of the rights and obligations of the parties to the underlying contract can specify the obligations of the guarantee. In addition, the guarantor is entitled to assert against the creditor any defences available to the principal obligor.
SBLC In contrast, the bank’s liability in the case of a standby letter of credit is not based on the underlying agreement between the bank’s client and the letter of credit beneficiary. Independent from the underlying contract, the letter of credit establishes a main obligation between the issuer and the beneficiary. The issuer must honour a payment demand that abides by the pertinent letter of credit provisions. The letter of credit’s obligation on the part of the bank is unaffected by the performance of the underlying contract.
Nowadays, it is widely accepted that a standby letter of credit is not a guarantee. Banks have been granted permission to issue standby letters of credit by all three federal government agencies that oversee banks. However, it is important to carefully draft the instrument to be seen as a standby letter of credit rather than a guarantee.
The buying and selling process is becoming increasingly globalized in the modern world, with international commercial dealings requiring considerable trust and confidence.
A Standby letter of credit serves as a buyer’s authentication certificate and keeps the customer and seller together at this critical juncture. The fundamental advantage of a standby letter of credit is that if the buyer fails to pay, the issuing bank will cover the entire sale price of the product.