Summary:
A Standby Letter of Credit works as a safety net against the risk of non-payment, which gives assurance of payment of a specified amount to a seller if buyers fails to meet the agreed terms. To ensure financial security and flexible export-import, it is necessary to gain a clear understanding of such documents to enhance creditworthiness.
Body:
Similar to the letter of credit, SBLCs are considered a useful instrument for flexible domestic and international trade. For unexpected events and prevent terms of business dealings, this document ensures that financial obligations to a beneficiary (exporter) are met. A bank gives assurance to a beneficiary that if something wrong happens, the terms and conditions stated are to adhere.
It is wise to use SBLCs where sellers and buyers don’t share a personal contact in the domestic and international transactions in an effort to overcome potential risks, such as bankruptcy and insufficient cash flow. In such an event, the bank guarantees to pay the amount to the seller as per the terms and conditions stated in the document. To know more about SBLCs and their procedure, keep reading this guide to clarify your concerns and move ahead in the right direction.
What is SBLC?
Standby Letter of Credit or SBLC is a legally binding agreement issued by the bank on behalf of its client to offer an assurance of paying the seller if the buyer defaults on the agreement. It serves as economical protection by assuring the seller that the bank will pay for delivered goods if the buyers fail to pay a specified amount on time.
Why Issue SBLC?
This letter of widely used in international trade to help the business grow globally and attain a contract. As the parties involved in the trade may not know each other, SBLC gives confidence to the seller to deliver goods and services to the buyers even if an unexpected event occurs.
It is considered an indication of positive faith in a business transaction that enhances buyers’ credit quality and repayment abilities. By making such arrangements, the beneficiary feels confident that he/she will get paid under any circumstances.
How does SBLC Work?
The procedure begins with applying SBLC at a commercial bank and then the bank will conduct its due diligence to evaluate creditworthiness. The level of security will be based on the risk involved, the power of the business, and the amount secured by the SBLC. After analysing the documents, the bank will issue SBLC to the buyer. In a case where the buyer fails to fulfil the terms of the contract due to cash flow, dishonesty, or other reasons, the seller needs to present all the documents stated in the SBLC to the buyer’s bank to receive the payment.
Types of Standby Letter of Credit
1. Financial SBLC
Financial-based SBLC gives assurance for the payment of goods or services, as mentioned in the agreement. It is issued to ensure financial obligations have been strictly adhered to. It is beneficial when making a transaction with overseas parties and when you’re uncertain of buyers’ ability to pay a specific amount.
2. Performance SBLC
Performance-based SBLC gives assurance of the completion of the project within a specified timeline. If a client fails to meet the project stated in the agreement, then the bank guarantees to reimburse the third party a specific amount of money as per the terms and conditions mentioned in the contract.
Conclusion:
SBLC is an assurance made by a bank on the behalf of its client (buyer), which ensures payment will be made for goods or services delivered to the beneficiary. The issue of SBLC can be a complicated process that starts with a bank performing underwriting duties and then send a request to a seller or creditor. Therefore, it is ideal to connect with a reliable consultant to settle on a suitable letter of your choice and find the best solution that ensures payment and timely delivery.
About the Author:
A non-banking financial consulting firm based in New Zealand that has been offering quality consultation services to its clients looking for assistance in Trade Finance. The company has access to an experienced team that offers assistance for a letter of credit, SBLC, performance guarantee, document collection, and more.
