An (SBLC) Standby letter of credit is an obligation of the bank, and not by the principal, to make payment upon receipt of the required documents. It is the bank that bears the payment obligation and is the guarantor of the security of the transaction.
A standby letter of credit means an obligation of the issuing bank to the beneficiary (exporter or bank) to make payment within the specified amount in case the applicant (importer) fails to fulfill its obligations under the main contract.
This requires the beneficiary to provide a certain list of documents, in particular his statement of non-fulfillment of obligations under the contract.
The party that acts as the principal of a standby letter of credit can be sure that in the event of a default in contractual obligations.
Stand-by Letter of Credit (SBLC): financing services and bank loans
One of the most reliable and convenient instruments for guaranteeing payments is a standby letter of credit (SBLC).
With can provide you with comprehensive assistance to meet your import and export business needs.
Advantages of (SBLC) standby letter of credit
The party that acts as the beneficiary of a standby letter of credit can be sure that it will receive funds from the bank when it provides all the documents required by the principal. This service includes the original payment request, a copy of the unpaid invoice along with copies of shipping documents.
SBLC is usually used in cases where one of the parties to the contract wishes to receive the maximum guarantee of the performance of contractual obligations by the other party.
For both parties involved in foreign economic transactions, this means greater security of the transaction and its compliance with international norms and standards. Another advantage is the use of the SWIFT system as a communication channel with the counterparty bank.
It provides fast and secure communication between more than 11,000 banks and financial institutions around the world.
A standby letter of credit is one of the forms to mitigate such risks as:
• The risk of the buyer receiving the wrong product or receiving the product late.
• Some significant legal risks associated with the international transaction.
Advantages of a standby letter of credit for the buyer and the seller
Advantages for a buyer (applicant):
1)Receiving goods without prepayment
2)Receiving goods with deferred payment
SBLC, documentary credit or bank guarantee: some differences in services
In the case of a documentary letter of credit, the issuing bank actively participates in the commercial transaction.
Only when the importer fails to fulfill its obligations contained in the contract, the exporter with the security in the form of a standby letter of credit may request payment from the issuing bank, presenting the documents required, including the statement of the exporter (beneficiary) of refusal to pay by the importer.
A standby letter of credit is also governed by other rules of the International Chamber of Commerce in Paris, which makes it different from most bank guarantees widely used around the world.
The content of a standby letter of credit is also more formalized than bank guarantees, due to the fact that it is most often sent in the form of a SWIFT message, where highlighted fields are used indicating, for example, the date of loading of the goods, the points of departure of the goods, etc.
In some cases, except for the name of the document, its content is no different from a regular bank guarantee, and sometimes in contacts with a counterparty from the United States, it is enough to replace the words “bank guarantee” with “backup letter of credit”, and there will be no problems with accepting this security for another side.
Use of standby letters of credit in foreign economic activity
Sometimes risks deter businesses from going further abroad because they don’t know how to minimize risk in foreign trade. Meanwhile, a period of geopolitical change and uncertainty in the markets (which is what we have been seeing in Europe and Asia since 2022) can be an excellent opportunity for businesses to develop new markets and occupy attractive niches.
A guarantee for business activities used by companies for transactional relations with foreign companies is (SBLC) Standby letter of credit.
SBLC is a versatile financial mechanism for ensuring payment under a contract, which in its economic essence resembles bank guarantees. However, the latter are usually provided on the basis of national legislation, while standby letters of credit are provided on the basis of international Uniform Customs and Practices (UCP).
The range of application of SBLC is quite wide and includes the following situations and services:
1. When there is a need to secure the exporter’s obligations under a letter of credit, which provides for an advance payment by the issuing bank, or to secure obligations to pay penalties and fines in favor of the importer.
2. When the buyer’s working capital is sufficient for timely payment of the contract, but the supplier insists on using a more secure form of payment than a traditional transfer. In this case, the parties can agree on payments under a foreign economic contract using promissory notes issued to the seller, or on the terms of a loan on an open account.
3. When the importer’s costs for opening a commodity letter of credit turn out to be unreasonably high.
4. When the payment terms of the foreign trade agreement do not provide for the letter of credit form of payments.
standby letter of credit is one of the main tools for securing international business transactions, so it is worth familiarizing yourself with its advantages and using them to improve your market position
SBLC is intended both for small and medium-sized companies that are just taking their first steps in foreign markets, and for large businesses that have been present in international trade for a long time.
Our team will help you master this financial mechanism with the maximum benefit for your business.
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