WHAT IS A STANDBY LETTER OF CREDIT? (SBLC)
A Standby Letter of Credit (SBLC) is a payment guarantee that is issued by a bank or financial institution by a SWIFT MT760 message and is used as payment for a client in the case that the applicant defaults.
A SBLC can be utilized within a wide range of financial and commercial transactions. They are very similar to Documentary Letter of Credits (DLC) but are different in that a Standby Letter of Credit (SBLC) only becomes usable if the applicant defaults.
In this case, the beneficiary of the SBLC can place a draw and demand payment.
A Standby Letter of Credit requires the presence of specific documents agreed upon in the terms and conditions of the SBLC.
Without the specific documents, payment cannot be made.
The SBLC protects the beneficiary by getting them paid, and protects the applicants for standby letters of credit in the case that the seller never ships the goods ordered, ships them damaged, or ships the goods not as agreed upon in the contract.
A SBLC is an extremely flexible financial instrument which makes it a great option for a variety of financial deals.
HOW DOES THE STANDBY LETTER OF CREDIT (SBLC).
Step 1: Application
Applicants for Standby Letters Of Credit should fill out and return the SBLC with the documents for your deal (Pro Forma Invoice, SPA, Contract, etc.)
Step 2: Issuing of Draft
A SWIFT MT760 draft of the Standby Letter of Credit (SBLC) will be created for you and your seller/exporter to review and confirm.
Step 3: Draft Review and Opening Payment
a) Finalize the draft between you and your seller/exporter and sign off on the draft (changes are free of cost).
b) We issue you a payment invoice for the SBLC, which you arrange to pay.
c) Once we receive your wire payment, we will release the finalized Standby Letter of Credit (SBLC) to the bank for issuance and delivery.
Step 4: Issuance
More often than not, the bank will issue the Standby Letter of Credit (SBLC) within 48 hours of release.
Once issued, a copy of the SBLC will be emailed to you as it is transmitted by a MT760 SWIFT message to the beneficiary, including the reference number of the SBLC.
Your seller’s bank will receive and confirm the Standby Letter of Credit (SBLC) transmission soon thereafter.
Step 5: Presentation of Documents
Once the seller/exporter has prepared and loaded all goods for shipment, they must send the specified documents for that particular shipment to their own bank.
Their bank will then forward the documents to our bank, and we will email you copies of the presentation and all of the documents that were submitted by the seller/exporter for your review and approval.
Step 6: Payment of Goods
Before our bank can release the original documents, we must receive payment for the presentation.
Once we have received payment, we cosign the documents to you and overnight them to your freight forwarder or to whomever you wish. This completes the transaction.
The Standby Letter Of Credit (SBLC) is governed by a set of guidelines known as the Uniform Customs and Practice (UCP 600), which was first created in the 1930s by the International Chamber of Commerce (ICC).
WHAT ARE THE TYPES OF STANDBY LETTER OF CREDIT? (SBLC)
1) Tender-Bond or Bid-Bond Standby Letter of Credit:
Is issued as part of a bidding process by a contractor to the project owner, to provide a guarantee to execute a contract if the buyer is awarded a tender or bid.
2) Performance Standby Letter of Credit:
Is an irrevocable undertaking by a bank to guarantee the beneficiary payment in the case that the buyer fails to perform on a contractual non-financial obligation
3) Advance-Payment Standby Letter Of Credit:
Used to facilitate a timely receipt of an advance payment.
4) Financial Standby Letter of Credit:
It is an irrevocable undertaking by a bank guaranteeing the buyer’s financial obligation to the beneficiary.
5) Insurance Standby Letter of Credit:
Supports an insurance obligation of the applicant.
6) Counter Standby Letter of Credit:
A separate Standby Letter of Credit given by a bank to another bank issuing a Standby Letter of Credit.
7) A Commercial Standby Letter of Credit:
Backs the commitment of a buyer to pay a seller for goods or services in the case of non-payment by the buyer.
8) A Direct-Pay Standby Letter of Credit:
Usually associated with tax-exempt or taxable bond-financed projects. Funds may be drawn upon the bond trustee without relying on funds provided by the client.