StandBy Letter Of Credit — Purchase Or Lease An SBLC

In today’s financial markets there is misinformation pertaining to Bank Guarantee and Standby Letter of Credit transactions, largely due to the lack of correct information available. In order to keep informed one must go out of their way to learn about the industry and how it operates. The Bank Instrument industry is a world where real information, truthful processes and real bank instrument providers are hard to come by. Here we will try to provide some useful information so that you can educate yourself further on how this industry operates. In this section we will talk about Standby Letters of Credit.

What Is A StandBy Letter Of Credit? Letters of Credit (LC) can be classified as either documentary Letters of Credit or Stand By Letters of Credit (SBLC/SLOC). A Documentary Letter of Credit allows payment to the seller. It facilitates the movement of goods in an international transaction. In trade finance, Letters of Credit is one method of payment used to reduce risk in global transactions between a Buyer and Seller of goods. They are mainly used for commodity and industrial use as performance bonds. A Standby Letter of Credit is an agreement, not intended to be drawn upon but is a safeguard in the event of non payment by either party mentioned in the contract. You can either lease or purchase a Standby Letter of Credit. In other words; an SBLC is a document issued by the bank guaranteeing payment on behalf of their client. The bank confirms the collateral is held within their clients account, the client buys an instrument and it is then freshly cut backed by Providers capital. De possible to Monetize an SBLC.

Finance A Business Using An SBLC Standby Letters Of Credit can be used to finance a business; particularly those looking to grow or expand. Having a SBLC monetized is the best and quickest way for a business to get some much needed cash. Bank instruments can be monetised and used to enter into trade platforms. SBLC’s could be one of the best alternative ways to finance a business. Reason being is that you are not dependent on a lender per se. It is likely that the funds will arrive in tranches and this could be a perfect way to manage your capital.

What Parts Do Banks Play In SBLC Transactions? Technically speaking, “Banks DON’T issue Standby Letters of Credit” Instead, the bank is the deliverer not the initiator of the transaction, they CONFIRM their client has the sufficient funds. For example; let’s pretend you use a courier to deliver a parcel to a customer. You are the Provider of the parcel and the courier is the delivery agent who delivers your parcel to the Receiver. The courier isn’t the Provider of the parcel, they are just the delivery agent whom the Provider uses to send the parcel from the Providers location to the Receivers location. using the above example, banks operate exactly the same way when handling Standby Letters of Credit. The bank acts as the courier and they receive a financial instruction from a Provider to deliver one of the Providers assets (Bank Guarantee — BG or SBLC) to the Receiver’s bank. In other words, the banks are in place of the courier, being that they are the Sender and Receiver of SWIFT message (Whether it be MT760, MT799..etc..) 

Genuine SBLC Providers

As discussed at the beginning, genuine SBLC Providers can be hard to come by. The banks don’t advertise SBLC’s as their own bank products, simply because they are not allowed to. Standby Letters of Credit are provided by high net worth clients with large cash holdings in an account at the Bank. High net worth clients are usually hedge funds, private equity, pension funds, and large coprations etc.. It is very difficult not only to get in touch with bank instrument Providers, they are very strict too, they don’t mess around. Genuine Providers perform many checks and balances which means that any authorised mandate agents connected to Providers are too follow strict procedures. This is good new on our part as we know we carry clean business but it means that any business we introduce needs to be able to follow certain procedures. Because of the strict ruling, HubHolzer will let you know what is required but in general we will ask for POF and BCL to say you can pay for 10% of the LTV/face value of the bank instrument. We want to know that every business that passes us has the capability to afford the lease fee.

How Do SBLC’s Work?

When a company completes the forms to lease an SBLC, what they are essentially doing is borrowing collateral (what this is actually called is a temporary “CTA” Collateral Transfer Agreement). Let’s say that you are an oil refinery company looking to buy oil and are dealing with say ABC Oil. You have an agreement with ABC Oil saying that you want to buy $100M USD worth of oil (on your books you have $103 1-JSD) . You may choose not to use your own bank account and apply through your own bank but instead, prefer to lease a StandBy Letter Of Credit from a different Provider. There are several ways SBLC’s can be used and it is all in the wording of the MT760. Providers can issue Standby Letters Of Credit for the purposes of:

• Trade and commerce — (for purchasing of goods).
• They can also be used to back credit lines issued by banks.
• And/or project funding.

As well, there are Providers who can issue cash backed SBLC’s which are monetizable. However we will need to know who the monetiser is in order to assign the SBLC in favour of the Monetizer.

SBLC Document Application and Requirements

When leasing a bank instrument, the DOA is a legal agreement signed by both Parties. It states that the titled owner will lease the SBLC for one year and one day at $100M USD giving it back with no liens or encumbrance. The legal documents is called a Deed of Agreement (DOA). Both banks will also send a Ready Willing and Able (RWA) message to each other. The Providers bank confirms it’s ready to issue the SBLC and Receivers bank confirrns their client has the funds. After the DOA and RWA are signed and SWIFT fees are paid, the banks of both parties will message each other until the instrument is transmitted to the Receiver. In some agreements should one fail to meet the timeline, there will be a penalty and risk of no further business. Two things to take note: 1) There is no standard leasing process, leasing programs differ and each determined by the Provider. 2) The Provider instructs the bank what to do therefore if you choose to go through a ba lots of paperwork as they have policies and guidelines to ahere to.