You Want Bank Instrument, But Don’t Understand What a Standby Letter of Credit (SBLC) Is? We are here to explain all about SBLC Providers
The Standby Letter of Credit serves a different function than the commercial letter of credit or Documentary Letter of Credit (DLC). Documentary Letter of Credit is a primary payment instrument for a transaction while Standby Letter of Credit (SBLC) serves as a secondary payment instrument.
So how do they work?
A bank will issue a Standby Letter of Credit at the authorization and on behalf of its 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 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 responsibility. The issuing bank is committed to make payment if the documents presented comply with the terms and conditions of the Standby Letter of Credit.
Why are SBLC issued?
Standby Letters of Credit are usually issued by banks to guarantee financial responsibility, to assure the refund of advance payments, to support performance and bid responsibilities, 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 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 is governed by a set of guidelines known as the Uniform Customs and Practice (UCP 600), which was first created in the 1930’s by the International Chamber of Commerce (ICC).
How Clients Receive a Standby Letter of Credit from SBLC Providers
Step 1: Apply
Fill out and return the Standby Letter of Credit (SBLC) Deed of Agreement
Step 2: Draft Copy of the SBLC
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 SBLC to the bank for issuance and delivery.
Step 4: Issuance
More often, the bank will issue the Standby Letter of Credit 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 transmission 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 countersign the documents to you and forward them to your consignment forwarder or to whomever you wish. This completes the transaction.