Definition Standby Letter of Credit (SLOC/SBLC)?

A standby letter of credit is a bank’s commitment of payment to a third party in the event that the bank’s client defaults on an agreement. It is a “standby” agreement because the bank will have to pay only in a worst-case scenario. A SBLC is most often sought by a business to help it obtain a contract.

A financial SBLC 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 performance SBLC , which is less common, guarantees that the client will complete the project outlined in a contract. The bank agrees to reimburse the third party in the event that its client fails to complete the project. {Note: Small businesses can have difficulty competing against bigger and better-known rivals.} A SBLC can add credibility to its bid for a project.

We, Funny SA Switzerland are SBLC provider with enormous knowledge in global financial system. Are also proof for buyer’s credit quality and repayment abilities. The procedure for obtaining a SBLC is similar to an application for a loan. The bank issues it only after appraising the creditworthiness of the applicant.

Power of the SBLC

Small businesses can have difficulty competing against bigger and better-known rivals. A SBLC can add credibility to its bid for a project.

The SBLC 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 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 company can present the SBLC to the buyer’s bank for payment. If a contract calls for construction of a building and the builder fails to deliver, the client presents the SBLC to the bank to be made whole.

  • A SBLC is a bank’s commitment of payment to a third party in the event that the bank’s client defaults on an agreement.
  • The process of obtaining a SBLC is similar to a loan application.
  • Thus, 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.

How Can I Get a Standby Letter of Credit?

The procedure for obtaining a standby letter of credit involves the applicant applying to a bank, establishing credit worthiness, and usually putting up cash collateral and paying a fee.

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A standby letter of credit, commonly referred to as an SBLC or SLOC, is a written obligation of the bank issuing the letter of credit stating that the bank will pay the beneficiary of the letter of credit in the event that the bank’s customer, the applicant for the SBLC , fails to pay the beneficiary money due him from the applicant. Essentially, the SBLC is a form of backup payment insurance designed to guarantee that the seller in a transaction receives the money due him from the buyer. It is payable to the beneficiary, in accord with the terms of the SBLC , upon demand, and the issuing bank cannot refuse to make payment due to any disagreements between the applicant and the beneficiary.

Standby letters of credit are commonly considered as certifications of the applicant’s creditworthiness and ability to make the necessary payment to fulfill his contractual obligation to the beneficiary of the SBLC . In the event that the bank issuing the SBLC ends up having to make payment to the beneficiary, it expects, or at least hopes, to be paid back by the applicant. The time frame an SBLC is in effect is usually about a year, allowing for the applicant to make standard payment to the beneficiary.

Facts About SBLC

If a seller requests a standby letter of credit, he commonly insists that it be an irrevocable letter of credit, meaning that the terms of the SBLC cannot be modified without the beneficiary’s consent. The applicant then requests the SBLC from his bank. The issuing bank typically reviews the creditworthiness of the applicant prior to issuing the SBLC. All but the most creditworthy applicants for an SBLC are required to post cash collateral with the issuing bank covering at least a portion of the amount of the SBLC and they must also pay a fee to the issuing bank, typically 2-5% of the amount of the SBLC . The applicant then provides a letter of confirmation to the beneficiary from the issuing bank; this is called a bank confirmation letter.

In addition to the applicant, the issuing bank and the beneficiary, a fourth party involved with an SBLC is the confirming or advising bank. This is a bank, usually located near the beneficiary, that pays the beneficiary on behalf of the issuing bank in the event that the SBLC becomes payable. This arrangement is more common in international transactions. The beneficiary usually pays the confirming bank a small fee.

An SBLC is transferable in that the beneficiary can sell or assign the rights to the proceeds from the SBLC , but the beneficiary remains the only party who can demand payment of the SBLC . In the event that such an arrangement is made, the beneficiary informs the issuing bank to pay the proceeds of the SBLC to the party the beneficiary has assigned to receive payment. There is no public trading of SBLCs.

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