What is the SBLC?
A standby letter of credit (SBLC) is a means of payment or a security for payment.
SBLC has two main popular purposes:
1) Credit enhancement for loan or enhance credit line enhancement,
2) Payment guarantee for international trade for good and/or services.
SBLC is a highly popular bank instrument which are used globally. It can be leased or purchased. SBLC for purchase is cash backed; SBLC for lease is asset based.
Beside the two main purchases, SBLC are often used for monetization purposes, even sometimes for private placement program (PPP).
SBLC is a highly popular bank instrument which are used globally. It can be leased or purchased. Purchased SBLC are often used for monetization purposes.
What are the differences between SBLC and DLC (documentary letter of credit)?
Under DLC payment terms, payment is conditional on the performance of the seller. Under SBLC payment terms, payment is conditional on non-performance of the buyer.
What are the differences between SBLC and LC (letter of credit)?
LC is a primary instrument of payment, so the goal is to use the LC to complete the transaction. In contrast, a SBLC is a secondary instrument of payment. If a seller is paid by a SBLC, it means that something went wrong with the buyer.
What is the monetization and how it works?
In order to monetize a SBLC Monetization you must be in possession of the instrument (in the form of MT 760) and it must be paid for prior to monetizing (Prior to requesting monetization).
Monetizing bank instruments such as an SBLC is the process of liquidating such instruments by converting them into money. It takes approximately 5 to 30 days to monetize an SBLC.
How does a SBLC actually work?
In case of securing a loan, a SBLC guarantees the payment of a specific amount of money to a bank if the applicant or beneficiary defaults. In such a case, the SBLC ensures the required payments are made to the bank after fulfillment of the required obligations.
In case of international trade, If the buyer fails to pay the seller for goods received, the seller can claim against the SBLC. The seller instructs their bank to claim on their behalf. Their bank contacts the buyers bank for payment. Under the terms and conditions of the SBLC, the buyers bank is legally obliged to pay.
Who needs the SBLC?
For international trade, a seller may feel their buyer lacks a certain creditworthiness. The seller requests the buyer to provide a SBLC in the seller’s favor. The buyer will instruct their bank to issue a SBLC in favor of the seller. Therefore, the buyer's bank becomes the issuing bank and the seller's bank becomes the receiving bank.
In case of applying for bank loans, the bank may require the applicant or borrower to enhance line of credit of increase its collateral. The application or borrower can purchase a SBLC for applying for the loan. Some receivers who purchase SBLC may use the bank instrument to monetize or even participate in PPP to make profits.
Who provides the SBLC?
SBLC is provided by the provider through its issuing bank to the receiver or beneficiary’s account through its receiving bank and it is transmitted interbank only through SWIFT (MT760).
What are the SBLC particulars or terms?
Issuing banks: SBLCs are normally issued by the world top 25 banks such as HSBC, Deutsche Bank, Barclays Bank.
The bank instrument face value can be from $/€100 million to $/€ 50 billion. Any amount over $/€500 million can be issued in tranches till the maximum limit is expended, depending on the intake capacity of the receiver or beneficiary.
The prices for leasing SBLC are between 4% to 10% plus intermediary fees of 2%.
The prices for purchasing SBLC are between 24% to 50% plus intermediary fees of 2%.
The transaction procedures are roughly as followings:
Pre-Advice SWIFT via MT-799, MT-760 to Buyer’s bank with Hard Copy to follow by bank bonded courier within seven (7) banking days after authentication of payment, payment by unconditional SWIFT Wire Transfer via MT103
What are the documents for applying the SBLC?
Applicant or receiver will need to provide the following documents to be considered:
- CIS (Customer Information Sheet)
- Corporate Board Resolution
- Non-Solicitation Letter
- Signatory's Passport Copy in Color
- Corporate Registration Copy in Color
- Updated POF (Proof of Funds), BCL (Bank Comfort Letter), or BS (Bank Statements)
- ATV (Authority to Verify Letter)
Applicant or receiver will receive Deed of Agreement (DOA) template with all related documents before the above documents are submitted to the provider. After receiving the DOA and related documents, receiver needs to fill in all the documents, sign and seal, and then send the documents back to the provider for countersign. The transaction procedures start from the DOA and related documents signed and each parties lodge their DOA and other documents with their own banks.
What happens if the leased SBLC is expiring?
If the SBLC is leased and is going to expire soon according to the signed DOA the tenure, the receiver or beneficiary is expected to return the bank guarantee to the issuing bank without encumbrances or liens and the receiver or beneficiary also has the obligation to indemnify the provider against any loss incurred against such instrument.
The beneficiary also has the option of extending the contract because DOA always comes with an option of rolls and extension of up to 5 years, sometimes even 10 years.
Why does the provide do not provide DOA or countersign the DOA?
Both the provider and the receiver agree to enter into a DOA contract that governs the issuance of the guarantee as guided by International Standard Practices of the industry and the ICC.
SBLC is issued from AAA rated banks only and it is widely accepted in all banks in the world with some exception that we may not be willing to send out a SWIFT to some banks/financial institutions based on our previous experience and relationship with such bank/institutions.
How to apply for a SBLC?
Please contact us directly through email. We will advise on what documents are needed for signing the DOA.
Please specify the SBLC particulars such as lease or purchase, currency, face value, tranche schedule and provide the above documents needed for applying the SBLC.
Applicant, receiver or beneficiary can submit their issuing bank's SWIFT verbiage for review and approval of the issuing bank, if not approved, the issuing bank’s standard verbiage will be used in SWIFT transmission.
For more information on how to utilize banking instruments such SBLC, contact us via email: info@globalfinancialgroup.ca. Thanks.
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