You Want Trade Financing, But Don’t Understand What a Standby Letter of Credit (SBLC) Is
The Standby Letter of Credit serves a different function than the commercial letter of credit or Documentary Letter of Credit (DLC).
The Documentary Letter of Credit (DLC) is a primary payment instrument for a transaction.
The Standby Letter of Credit (SBLC) serves as a secondary payment instrument.
So how does it work?
A bank will issue a Standby Letter of Credit on behalf of a client to provide assurances of his/her ability to perform under the terms and conditions of a contract between the client and the beneficiary.
The parties involved with the transaction do not expect that the Standby Letter of Credit (SBLC) will ever be drawn upon.
The Standby Letter of Credit guarantees the beneficiary of the performance of the client's obligation. The beneficiary is able to draw under the credit by presenting documents and evidence to the issuing bank that the client has not performed its obligation.
The issuing bank is obligated to make payment if the documents presented comply with the terms and conditions of the Standby Letter of Credit.
Why are they issued?
Standby Letters of Credit (SBLC) are usually issued by banks to guarantee financial obligations, to assure the refund of advance payments, to support performance and bid obligations, or to assure the completion of a sales contract. The Standby Letter of Credit always has an expiration date.
The Standby Letter of Credit is often used to guarantee contract performance or to strengthen the credit worthiness of a client.
If payments are made in accordance with the suppliers' terms and conditions, the Standby Letter of Credit (SBLC) would not have to be drawn on. The seller goes to directly to the customer for payment.
What if the client doesn’t pay?
If the client is unable to pay, the seller presents the documents to the issuing bank for payment.
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).
How Does a Client Receive a Standby Letter of Credit (SBLC) from Trade Finance Network
Step 1: Application
Fill out and return the Standby Letter of Credit (SBLC) Application
Step 2: Issuing of Draft
A draft of the Standby Letter of Credit (SBLC) will be created for you and your seller/supplier/exporter to review.
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 SWIFT, including the reference number of the SBLC.
Your seller’s bank should be able to 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.