What is a Standby Letter of Credit (SBLC / SLOC)?
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. A standby letter of credit can be abbreviated either as SLOC or SBLC.
Financing for your small business isn’t always easy to come by—but it’s important to look down every avenue of opportunity; you might not be aware of one of the most powerful financing tools out there. Standby letters of credit can help your business in tough contractual and financial situations, making people more likely to sign contracts and do business with you.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.
An SLOC/SBLC is frequently used as a safety mechanism for the beneficiary, in an attempt to hedge out risks associated with the trade. Simplistically, it is a guarantee of payment which will be issued by a bank on the behalf of a client. It is also perceived as a “payment of last resort” due to the circumstances under which it is called upon. The SBLC prevents contracts going unfulfilled if a business declares bankruptcy or cannot otherwise meet financial obligations.
Furthermore, the presence of an SBLC is usually seen as a sign of good faith as it provides proof of the buyer’s credit quality and the ability to make payment. In order to set this up, a short underwriting duty is performed to ensure the credit quality of the party that is looking for a letter of credit. Once this has been performed, a notification is then sent to the bank of the party who requested the Letter of Credit (typically the seller).
In the case of a default, the counter-party may have part of the finance paid back by the issuing bank under an SBLC. Standby Letter of Credit’s are used to promote confidence in companies because of this.
Needless to say that a SLOC 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 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.
As explained above, there are two main types of standby letters of credit: A financial 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.
The recipient of a standby letter of credit is assured that it is doing business with an individual or company that is capable of paying the bill or finishing the project.
Top Wealth Finance Ltd is a StandBy Letter of Credit (SBLC) provider @ 4% leasing fee per year. Most banks and other financial institutions charge standard fee of between 1-10% of the SBLC value. In the event that the business meets the contractual obligations prior to the due date, it is possible for an SBLC to be ended with no further charges.
If you are looking for SBLC or Bank Guarantee from AAA rated banks Click Here to Get a BG / SLOC / SBLC From AAA rated banks in UK, USA, France, Germany or Dubai.
Please be informed that StandBy Letter of Credit (SBLC) is different from a Bank Guarantee (BG). Read about bank guarantees here.
Also, a Standby Letter of Credit is different from a Letter of Credit. An SBLC is paid when called on after conditions have not been fulfilled. However, a Letter of Credit is the guarantee of payment when certain specifications are met and documents received from the selling party.
Letters of credit promote trust in a transaction, due to the nature of international dealings, distance, knowledge of another party and legal differences.
Difference between LC and SBLC
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 on the non-performance or default on the part of the buyer.
lease sblc, top letters of credit providers, top sblc providers, guaranteed lease program, lease bg sblc providers, top letters of credit providers, top bg providers,. 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.
Where goods are sold to a counter-party in another country, they may have used an SBLC to ensure their seller will be paid. In the event that there is non-payment, the seller will present the SBLC to the buyer’s bank so that payment is received.
A performance SBLC makes sure that the criteria surrounding the trade such as suitability and quality of goods are met.
We sometimes see SBLCs in construction contracts as the build must fulfill many quality and time specifications. In the event that the contractor does not fulfill these specifications then there is no need to prove loss or have long protracted negotiations; the SBLC is provided to the bank and payment is then received.
There are many aspects that a bank will take into consideration when applying for a Standby Letter of Credit, however, the main part will be whether the amount that is being guaranteed can be repaid. Essentially, it is an insurance mechanism to the company that is being contracted with.
As it is insurance, there may be collateral that is needed in order to protect the bank in a default scenario – this may be with cash or assets such as property. The level of collateral required by the bank and by the size of the SBLC will largely depend on the risk involved, and the strength of the business.
Generally speaking, the standby letter of credit process is similar to that of obtaining a commercial loan, with a few key differences.
As with any business loan, you will need to provide proof of your creditworthiness to the bank. However, the SLOC approval process is much quicker, with letters often being issued within a week of all paperwork being submitted.
Top Wealth Finance Ltd is a Standby Letter of Credit (SBLC) provider at 4% leasing fee per year. All our bank instruments are issued from prime banks such as HSBC Hong Kong, Barclays Bank London, Standard Chattered Bank or any AAA rated bank of your choice.
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As top sblc providers, our bg and sblc are cash backed and can be used for Discounting, Monetization and Private Placement Programs (PPP). They also can be used as collateral against a loan or credit line to secure Funding for Projects.
We also provide Business Loans, SME Loans, International Project Financing, recourse Loans, Non Recourse Loans, Letter of Credit, Standby Letter of Credit, Bank Guarantee, Performance Guarantee Bond, Tender Bond Guarantee, Advance Payment Guarantee, Bank Comfort Letter.