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| StandBy Letter of Credit (SBLC/SLOC) Meaning, Types & Uses |
1. What is Standby Letter of Credit (SBLC/SLOC)?
A standby letter of credit (SBLC or SLOC) is a
guarantee of payment by a bank on behalf of their client. It is a loan
of last resort in which the bank fulfills payment obligations by the end
of the contract if their client cannot.
A standby letter of credit can also be abbreviated SBLC or SLOC. A standby letter of credit is different from a bank guarantee.
A standby letter of credit can also be abbreviated SBLC or SLOC. A standby letter of credit is different from a bank guarantee.
2. Types and Examples of Standby Letter of Credit (SBLC/SLOC)
Financial standby LOC: An
exporter sells goods to a foreign buyer, who promises to pay within 60
days. If the payment never arrives (and the exporter required the buyer
to use a standby letter of credit) the exporter can collect payment from
the importer’s bank. Before issuing the letter of credit, the bank
typically evaluates the importer’s credit and determines that the
importer will repay the bank. But if the customer’s credit is in
question, banks may require collateral (or funds on deposit) for
approval.
Performance standby LOC: A
contractor agrees to complete a construction project within a certain
timeframe. When the deadline arrives, the project is not complete. With a
standby letter of credit in place, the contractor’s customer can demand
payment from the contractor’s bank. That payment functions as a penalty
to encourage on-time completion, funding to bring in another contractor
to take over mid-project, or compensation for the headaches of dealing
with problems. This is an example of a “performance” standby
letter of credit, and a failure to perform triggers the
payment.
3. Advantages of a Standby Letter of Credit (SBLC / SLOC)
An SBLC helps ensure that the buyer will receive the goods or service
that's outlined in the document. For example, if a contract calls for
the construction
of a building and the builder fails to deliver, the client presents the
SLOC to the bank to be made whole. Another advantage when involved in
global trade, a buyer has an increased certainty that the goods will be
delivered from the seller.
Also, small businesses can have difficulty competing against bigger
and better-known rivals. An SBLC can add credibility to its bid for a
project and can often times help avoid an upfront payment to the seller.
For the business that is presented with a SLOC/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 seller can present the SLOC to the
buyer's bank for payment. Thus, the seller is guaranteed to be paid.
Another advantage for the seller is that the SBLC reduces the risk of
the production order being changed or canceled by the buyer.
4. Uses of SBLC / SLOC
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.
The SBLC / SLOC is often seen in contracts involving international trade,
which tend to involve a large commitment of money and have added risks.
4. Uses of SBLC / SLOC
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.
A
standby letter of credit 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/sloc 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.There are two main types of standby letters of
credit:A financial sblc/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.
Standby letters of credit can help establish trust with your business
partners and be a powerful tool to help meet your business goals.
Please note that Standby Letter of Credit (SBLC/SLOC) is different from Letter of Credit (LC).
A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade,
where the reliability of contracting parties cannot be readily and
easily determined. Its economic effect is to introduce a bank as an underwriter, where it assumes the counterparty risk of the buyer paying the seller for goods
The major 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 SBLC 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.
LC and SBLC 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.
6. The cost and charges of SBLC/SLOC
The fee or charge to obtain a standby letter of credit is between 1-10% of the SBLC/SLOC amount before issuing the sblc/sloc. This fee is usually charged per year that the letter of credit is in effect. If the sblc/sloc is needed for more than one year, there will be an option of rolls and extensions where applicable. If the terms of the contract are fulfilled early, you can cancel the SLOC/SLBC without incurring additional charges.
7. The Process & How to Obtain a Standby Letter of Credit (SBLC / SLOC)
Standby Letter of Credit (sblc/sloc) is a financial instruments issued by banks and other financial institutions such as Kingrise Finance Limited. This financial instrument is used to obtain loan and financing from banks, it can also be used for trade financing, foreign exchange transactions as well as in import and export transactions.
As with any business loan, you will need to provide proof of your creditworthiness to the bank. However, the SBLC / SLOC approval process is much quicker, with letters often being issued within a week of all paperwork being submitted.
One of
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