What is Standby Letters 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 the client cannot fulfil 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.

How can a contractual (SBLC / SLOC) be used?

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 is certain to receive payment, a SLOC doesn’t guarantee the buyer will be happy with the goods.

Types of Standby Letters of Credit (SBLC / SLOC)

• Performance SLOC
  • Performance standby letters of credit ensure the nonfinancial contractual obligations (quality of work, amount of work, time, cost, etc.) are performed in a timely and satisfactory manner. If these obligations are not met, the bank will pay the third party in full.

• Financial SLOC
  • Financial standby letters of credit ensure financial contractual obligations are fulfilled. Most SLOCs are financial.
  • Financial SLOCs are often required when performing international trade or other large purchase contracts under which other forms of payment protections (such as litigation in the event of non-payment) can be difficult to obtain.

How a Standby Letter of Credit (SBLC) Works

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 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 from going unfulfilled if a business declares bankruptcy or cannot otherwise meet financial obligations.

Read Also: Bank Guarantee What is It?

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 letters of Credit are used to promote confidence in companies because of this.

Needless to say, an 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 of 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 performance SLOC, which is less common, guarantees that the client will complete the project outlined in a contract. The bank agrees to reimburse the third party if its client fails to complete the project.
• 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.

What are the fees for Standby Letters of Credit?

Artley Finance (HK) Limited is a StandBy Letter of Credit (SBLC) provider @ 4% leasing fee per year. Most banks and other financial institutions charge a 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 an SBLC or Bank Guarantee from AAA-rated banks Click Here to Get a BG / SLOC / SBLC From AAA-rated banks in the UK, USA, France, Germany or Dubai.

What is the difference between a StandBy Letter of Credit (SBLC) and Letters of Credit ( LCs )?

Please be informed that a 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 are 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 Letters of Credit ( LC ) and Standby Letters of Credit ( 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 international traders i.e. buyers and sellers. It simply means that both these terms are widely useful while making transactions between the two trading parties. These help in giving financial security to both parties. Also, these contracts are produced in good faith and in both 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 the security of being paid on time after 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 issues by bringing in the buyer’s and seller’s banks into the transaction.

The issuing bank of the buyer, then, opens an LC in the favor of the seller and states that the seller will be paid and that he or she will not suffer any damages or losses because of the non-payment of the buyer. However, 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 of the supplier, whereas SBLC depends on the non-performance or default on the part of the buyer.

An 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 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.

Read Also : Bank Instruments All You Need To Know

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

How do SBLCs work in Cross-Border trade?

Where goods are sold to a counterparty in another country, they may have used an SBLC to ensure their seller will be paid. If there is a 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 fulfil many quality and time specifications. If the contractor does not fulfil 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.

 Who is a Genuine SBLC Provider? How Does One Find Genuine BG/SBLC Providers?

Genuine SBLC Providers are bank or financial services providers like Artley Finance (HK) Limited that provide real and genuine SBLC from prime banks.

To understand who these Providers are and how they function, one must understand what is called Collateral Transfers in the financial world. Collateral Transfer is the process of transferring assets from one party (the Provider) to another party (the Beneficiary) often in the form of a Bank Instrument (BG/SBLC). This occurs whereby the Provider agrees (through his Issuing Bank) to issue a “Demand Guarantee” to the Beneficiary in return for a “rental” or “return” generally known as the “Contract Fee”. The parties agree to enter into a Collateral Transfer Agreement (CTA) which governs the issuance of the guarantee.

How to Obtain a Standby Letter of Credit (SBLC / SLOC)

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 for 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.

Artley Finance (HK) Limited is a Standby Letter of Credit (SBLC) provider at a 4% leasing fee per year.  All our bank instruments are issued from prime banks such as HSBC Hong Kong, Barclays Bank London, Standard Chartered Bank or any AAA-rated bank of your choice.

Standby Letter of Credit (SBLC / SLOC) Description:

1. Instrument Type: Cash Backed StandBy Letter of Credit (SBLC/SLOC)?
2. Face Value: USD 1 Million (Minimum) to USD 5 Billion (Maximum)
3. Issuing Bank: Barclays Bank London, HSBC Hong Kong, Citibank New York, Deutsch Bank Germany or any prime bank.
4. Age: One Year and One Day (with rolls and extensions where applicable)
5. Leasing Price: 4% of Face Value plus 2% brokers commission (Applicable only if there are brokers in the transaction)
6. Delivery: SWIFT MT-760
7. Payment: MT103 Swift Wire Transfer
8. Hard Copy: Bank Bonded Courier within 7 banking days.

If you are a trader, contractor, importer/exporter in need of SBLC for your import/export transactions or to secure a loan.  Email us: finance@artleyfinance.com

Below is a Standby Letter of Credit (SBLC) Factsheet You Need To Know!

1. All SBLC/BG are Asset/Cash backed. A newly created SBLC/BG is called “Fresh Cut” whereas an already existing SBLC/BG is called “Seasoned”
2. Whether purchased or leased, SBLC / BG is issued for a “term” having validity normally for 1 year and 1 day which may extend up to multiple years depending on the Provider’s own discretion and Provider’s level of comfort with the Beneficiary.
3. Most banks will issue an SBLC/BG to any of their customers if they have sufficient (100% of Face Value of the Instrument) liquidity (cash) in their bank account or available balance in their credit line (if they are already availing a credit line from the bank). It’s a complete myth that “Banks Do Not Issue SBLC/BG). This direct transaction between a client and his bank is the “Primary Market” transaction.
4. Providers of SBLC/BG such as ARTLEY FINANCE (HK) LIMITED generally are a part of the “Secondary Market” transactions. SBLC/BG Providers are high-net-worth corporations or individuals who hold bank accounts at the issuing bank that contain significant cash sums (assets).
5. SBLC/BG Providers would often be a collateral management firm, a hedge fund, or a private equity company. SBLC/BG Provider instructs its issuing bank to secure and encumber cash in his account and authorizes the bank to “cut” (an industry term meaning to create a financial instrument such as SBLC/BG ). Effectively, the SBLC/BG is “leased” or “sold” to the Beneficiary as a form of investment since the Provider receives a return on his commitment.
6. SBLC/BG is issued under ICC/URDG 758 (UPC 600) protocol and is readily accepted by almost all International as well as Private Banks.
7. SBLC/BG is issued by the Issuing Bank of the Provider to the Beneficiary’s bank account at the Receiving Bank and is transmitted inter-bank via the appropriate SWIFT platform alone (MT-760).
8. The Provider and the Beneficiary agree to enter into a Collateral Transfer Agreement (CTA) which governs the issuance of the SBLC/BG. The SBLC/BG is specifically issued to the Beneficiary for a defined purpose and each contract is bespoke. It is effectively a form of “Securities Lending” and often a derivative of “re-hypothecation”. The fact that there is an underlying agreement (the CTA) has no bearing on the wording or construction of the Guarantee (SBLC/BG). This allows the Beneficiary to use the SBLC/BG to raise credit, to guarantee credit lines and loans or to enter trade positions or buy/sell contracts.
9. SBLC/BG is valuable in the secondary and tertiary markets, and this also creates an environment for Intermediaries to profit on the leasing and selling of SBLC/BG. Unfortunately, this also creates misunderstandings and opportunities for fraud. Scammers keep trying, by imposing their “procedures” which in general, involve rushed deals with no hard copies to follow, advanced payments, and so on.
10. By its own nature and definition, only banks can legally issue SBLC (Stand-By Letters of Credit) or BG (Bank Guarantee). This is not only common sense but regulated by banking laws in most countries since these are debt obligations issued by banks.
11. SBLC/BG must be UCP-600 compliant and hence it must be issued by a licensed bank alone. Otherwise, it will not be UCP-600 compliant, regardless of the wording of the document.  If it is not UCP-600 compliant, no bank will ever accept it as collateral or even as a documentary credit. While it is true that URDG-758 changed this from banks to “a bank, other institution or person” may act as a guarantor, the fact is that URDG-758 rules implied that financial stability of the guarantor is obligatory and that the issuance of said documents shall be governed by the internal legislation of each country. Regardless, most banks will only accept documentary credit from other banks, due to their financial stability and their full compliance with local laws.
12. Banks, in general, will monetize only an “owned/purchased” SBLC/BG. They will not monetize a “leased” SBLC/BG. In contrast to a purchased or owned SBLC where the buyer becomes the official owner of the instrument and in turn would be able to lease the SBLC out to a Third Party, a “leased SBLC” cannot be “leased out” any further.
13. There are private Monetizers who would monetize a “leased” SBLC/BG. Some Monetizers will, however, only accept SBLC/BG with CUSIP or ISIN Numbers. This means they will NOT accept a fresh cut bank guarantee, ONLY seasoned instruments. Seasoned BG’s cost more and generally are only available to be purchased from secondary owners not banks.
14. Although a leased SBLC/BG is not considered an “asset” (a leased SBLC/BG is not trading securities, trading debt instruments, or trading investment funds.
15. There is no public market for the trading of SBLC/BG. All SBLC/BG transactions are private transactions), it can still be monetized, discounted or funded (whereby the SBLC/BG is turned into usable cash) by a resourceful Monetizer. Remember, SBLC/BG is after all a written obligation of the issuing bank to pay a sum on to a beneficiary on behalf of their customer in the event that the customer himself does not pay the beneficiary.
16. The Instrument/ Security remains valid during the term before the Expiry Date. Such resourceful Monetizers possess the capacity to a draw a line of credit against “leased” SBLC/BG and use part of the cash to pay the client his “Non Recourse Monetization Payment” (often 40% to 65% of the value of the Leased Bank Instrument known as “Loan To Value” (LTV).
17. The Monetizer then takes the balance of the money from the Line of Credit and places these funds into Trade / PPP using a proprietary trading platform. This platform is often a group of experienced bank traders who use the Monetizers cash and trade it generating significant profit returns on a weekly or monthly basis. Often the Platform uses normal trading risk protection strategies to ensure the Monetizer’s funds receive significant protection from all trading downside risks.
18. Most people often confuse the term NOT RATED with the fact that some SBLC/BG issuing entities are not real banks, but private companies offering consulting services, and sometimes, issuing documents that are beyond their legal and financial capacity, hiding behind the excuse that because they are an “offshore bank” or a foreign corporation or because they only deal with foreigners, they do not need to hold a banking license or comply with reserve deposits with the Central Banks of the jurisdictions from where they operate. The reality is, a rating is just an opinion given by one person or company, about the credibility of the bank or institution what the rating is about; but this has almost nothing to do with the truth, that the documents in question are worthless not because of the credit rating of the issuer, but because the issuer is not a bank.
19. For political reasons, most Eurozone regulated banks avoid, as much as they can, to work with banks of certain countries. Trying to monetize an instrument issued by a Latin American country, or even China is almost impossible!!
20. Even Europe is not free of that problem; for example, while the list of embargo banks from Russia and Ukraine is very small, most Eurozone regulated banks prefer to not accept as collateral instruments issued by any Russian or Ukraine based banks, they say it is to reduce their risks as much as possible and to avoid working with banks that while not currently on the embargo list, can be included in the said list at any time.
21. Some other countries have strong, reliable and highly praised banks with excellent credit ratings, like Azerbaijan, yet almost no Eurozone regulated bank wants to work with instruments issued by them; this limits the ability of most monetizers to work with instruments from banks of these countries regardless of the credit rating of the bank.
22. To determine if a borrower is worthy of an SBLC/BG, many banks will undertake a credit analysis. Credit analyses focus on the ability of the organization to meet its debt obligations, focusing on default risk. Lenders will generally work through the five C’s to determine credit risk: the applicant’s credit history, capacity to repay, its’ capital, the loan’s conditions, and associated collateral.
23. This form of due diligence can revolve around liquidity and solvency ratios. Liquidity measures the ease with which an individual or company can meet its financial obligations with the current assets available to them, while solvency measures its ability to repay long-term debts. Specific liquidity ratios a credit analyst may use to determine short-term vitality are current ratio, quick ratio or acid test, and cash ratio. Solvency ratios might entail the interest coverage ratio.
24. SBLC/BG denotes an irrevocable obligations assumed by banks. The principle that if a compliant demand is made under a standby letter of credit, an issuing bank must pay, subject to only very limited exceptions.
25. A key purpose of the widespread use of standby letters of credit to finance commodity transactions is the comfort it gives to the seller that it will receive payment.
26. The drafting of the SBLC/BG should provide that the presentation of a demand would be conclusive evidence that the amount claimed was “due and owing” to the Beneficiary of the SBLC/BG. The beneficiary’s belief that payment was “due and owing” should activate payment.
27. The meaning of the words “obligated to pay” has to be considered in the context of the certificate to be tendered under the SBLC/BG.
28. Exceptions to the rule that an issuing bank must pay under an SBLC/BG are limited and difficult to prove. If you have concerns about the reliability of your counterparty, requiring them to provide an SBLC from a reliable bank governed particularly by English law remains a good way of securing payment.
29. If you are the beneficiary of an SBLC/BG, you should insist that it contains clear wording to the effect that the presentation of a demand by you will be conclusive evidence that the amount claimed will be “due and owing”. To rely on the strength of these decisions, you should also ensure that English law governs the SBLC/BG, even if it does not govern the underlying contract.
30. The great utility of the standby letter of credit is reflected in the fact that it can be used in practically any situation in which one party to a contract is concerned with the other party’s ability to perform. Some of the many ways in which a standby letter of credit can be used are: to ensure payment or performance in construction financing, corporate consolidations, real estate transactions, management contracts, leases on real and personal property, stock transfers and purchases, and bid and performance bonds; to ensure payment of salaries to highly paid individuals such as professional athletes and entertainers; and to ensure payment of professional services such as attorney’s fees.
31. The standby letter of credit is neither a contract nor a negotiable instrument and if it is not properly drafted, it will not be considered a guarantee at all. The standby letter of credit or SBLC/BG is a distinct legal instrument, unlike any other. The obligation of the issuer of the SBLC/BG is independent of the underlying contract between the issuer’s customer and the beneficiary of the SBLC.
32. The standby letter of credit enables a businessman to enter into business ventures with minimal fear of loss. By substituting the credit of a third party, usually a bank, for that of the debtor, the businessman can help to protect his investment. Finally, the standby letter of credit is particularly well suited for preventing loss or delay of payment caused by the debtor’s bankruptcy.
33. Because the standby letter of credit and its proceeds are not part of the bankruptcy estate, the beneficiary of a standby letter of credit should receive payment from the bank without delay. The low cost and adaptability to a wide range of business transactions make the standby letter of credit very attractive to the business community and to business lawyers.
34. Standby letters of credit frequently involve negotiated, complex agreements and larger dollar amounts where lawyers tend to be more involved. Examples include standbys supporting or securing municipal bond issues, construction contracts, subdivision and municipal improvements, commercial real estate leases, equipment leases, cable installations, reinsurance requirements of non-admitted reinsurers, power purchase contracts, SWAP agreements, securitizations, self-insured retention amounts in insurance fronting arrangements, indemnification obligations for surety bonds, supersedeas bonds to stay execution of a judgment pending an appeal, prejudgment attachments bonds, government contracts or privileges, clearing obligations of brokers and dealers, advance payment guarantees, and open account sales.
35. Commercial letter of credit customs and practices carry over and are applied to standby letters of credit because standby letters of credit evolved from and have many characteristics in common with commercial letters of credit. Commercial letter of credit customs and practices were established well before standby letters of credit gained usage and popularity.
36. Until 1998, when the International Standby Practices or “ISP”5 was promulgated, almost all letters of credit were issued subject to the Uniform Customs and Practice for Documentary Credits (the UCP).
37. The UCP is specifically geared to examining documents presented in international trade such as drafts, bills of lading, other types of shipping documents, insurance certificates, inspection certificates, commercial invoices, and packing lists. The UCP also provides for the “negotiation” of drafts and documents presented to banks other than issuers that are “nominated” in letters of credit to purchase and present the drafts and documents. Both of these situations—live commercial documents and negotiation of drafts and documents—are seldom relevant to or found in standby letters of credit practice.
38. The UCP governs standby letters of credit to the extent that its articles are applicable. The UCP does not explain when and how its articles should be applied to standby letters of credit. Even preparing a draft to be presented under a standby letter of credit can present challenges for those who do not have a working knowledge of how banks expect drafts to be worded and presented. Yet every regime that governs letters of credit provides that standard banking practices or international standard banking practices are to be used to determine whether documentary presentations and other aspects of letter of credit transactions are proper and compliant.
39. Much of the lack of familiarity with or transparency of standby letter of credit practices has been overcome by the International Standby Practices or ISP. The ISP’s rules specifically address standby letters of credit practice separate and apart from commercial letters of credit practice. The ISP’s rules are well written and for the most part are clear, even-handed, and straightforward.
40. They avoid significant pitfalls of using the UCP in standby letters of credit, such as press
41. notation of stale documents, instalment drawings, force majeure, and the requirement that documents and data in documents be consistent. Unfortunately, the UCP is still used in almost half of the standby letters of credit issued in this country and probably in more than half issued by foreign banks in other countries. Additionally, even the ISP’s rules are not all-encompassing. Resort to standard banking practices outside the ISP, caselaw, and the UCC is necessary to fill in the gaps.
42. Finally, there are several rules or provisions of the ISP, the UCP or the UCC that govern standby letters of credit that lawyers and their letter of credit applicants or beneficiary clients may not be familiar with, overlook, or miscomprehend their import. Many letters of credit customs, practices and rules are counter-intuitive and cannot be predicted by resorting to simple contract law principles or even other articles of the UCC.