Whether it is a standby letter of credit (SBLC) or a bank guarantee (BG), both are payment guarantees issued by a bank on behalf of a customer who will use it as a \”payment of last resort\” in the event of non-compliance by his partner with a mutual contractual commitment.
In general, the standby letter of credit shows the credit quality of a company and its ability to repay loans. Although SBLC/BG is not intended to replace immediate cash payment obligations, it helps to meet business obligations in the event the business goes out of business, cannot pay suppliers, or becomes insolvent.
Standby letters of credit can be particularly beneficial in encouraging investors to lend money to a small business that often has difficulty obtaining financing since, in the event of default, investors are assured that they will receive principal and interest via the bank that secured the SBLC/BG.
In order not to confuse SBLCs, Documentary Letters of Credit (DLC), and Bank Guarantees (BG), you should know that:
- SBLCs only become operational in the event of default by the applicant, \”in the event of default, the beneficiary in whose favor the SBLC was issued, may demand payment\”,
- On the other hand, a documentary credit is rather a means of payment since the buyer goes to his bank and asks him to pay the seller at a given time, that is to say on a date or on the completion of a condition (delivery for Example).
- But bank guarantees are different in terms of protection, although these have the same main objective of SBLCs which is to ensure that sellers will be paid, \”a standby letter of credit SBLC protects the seller only, while a Bank Guarantee (BG) protects both parties as it also protects the buyer if the supplier never ships the goods or ships them in a damaged condition.
The fees depend on the purchase or the lease of the SBLC value. If the business owner meets the criteria outlined in the contract before the due date, the business owner can cancel the SBLC without further charges.
Standby Letters of Credit (SBLC) are a very flexible tool, making them a suitable product for securing a wide range of payment scenarios. A financial SBLC, the most common type, is typically used in international trade or other high-value purchase contracts where litigation or other non-payment actions may not be feasible. A financial SBLC guarantees payment to the beneficiary if criteria outlined in the contract are left unfulfilled. For example, an exporter sells goods to an overseas buyer who guarantees payment in 30 days. When the payment does not appear by the deadline, the exporter presents the SBLC to the importer’s bank and receives the payment.
A performance SBLC ensures the time, cost, amount, quality of work, and other criteria are fulfilled in a manner acceptable to the client. The bank pays the beneficiary if any of the written obligations are unmet. For example, a contractor guarantees a construction project will be finished in 90 days. If work remains incomplete after the 90-day period, the client can present the SBLC to the contractor’s bank and receive the payment due.