What is a STANDBY LETTER OF CREDIT ?
It is a DOCUMENTARY guarantee paid on first demand which aims at securing the PERFORMANCE of a contract, an obligation or a flow of commercial transactions. A Standby Letter of Credit (SBLC or SLOC) is a guarantee that is made by a bank on behalf of a client, which ensures that the payment will be made even if their client cannot fulfill the payment or stay in default. And even if their client goes into bankruptcy ! It is a payment of last resort from the bank, and ideally, it should never have meant to be used. As the definition says, it is a STANDBY, meaning that the bank will have to pay ONLY in case of default.
TYPES OF SBLC
1. PERFORMANCE SBLC
A performance SBLC ensure the non-financial contractual obligations are performed in a satisfactory manner in a certain time frame. For a contract to execute a work in a certain time, to deliver a project in a certain time, etc. If these obligations are not met, the bank will pay the third party in full.
Sometimes it is a very big benefit for the seller when the buyer issues an SBLC for the execution of a project. Because the contractor (seller) can MONETIZE this SBLC to already pay his goods and labour to get the job done. So he does not have to finance the whole amount up front.
– For International Trade relations, an SBLC protects or Buyer or Seller (In most cases the Seller) in case of NON-PAYMENT by the buyer.
– SBLC protects the Buyer: the SBLC of good execution. The SBLC for advanced payment restitution. The SBLC’s waiver of hold bank. The commercial LLSC (most common). The SBLC Submission.
– The advantage of an SBLC in an International context. Excellent tool to secure international trade commitment. Based on stable community and International rules that are recognized between the different States, Countries, which allows for an intervention within a harmonized framework accepted by the countries of the contracting parties.
MSFinAdvice has direct contact with specialized banks issuing the SBLC (Stand By Letter of Credit) for commodity trade for the clients and MSFinAdvice has the authority to do the DD and verification of the contracts. Once MSFinAdvice gives the green light to the client, a mandatory contact with the receiving bank has to be set up to make sure the procedure between the banks is agreed and confirmed. Then the file goes to the issuing bank, who will issue the agreements and after acceptance of the client, the bank will invoice the cost of the SBLC, DIRECT to the client. MSFinAdvice will coordinate the MT’s (799 and 760).
Again the mistake of many clients: They want the SBLC issued by a TOP rated bank. But these TOP rated banks ONLY issues SBLC’s for their own clients! MSFinAdvice has direct contact with TOP rated banks, and it was confirmed by these banks they do not issue SBLC’s or other instruments for NON-CLIENTS!
2. Financial SBLC
A financial SBLC ensure that financial contractual obligations are fulfilled. Most SBLC’s are financial.
Financial SBLC’s, often are required when performing international trade or other large purchase contracts, under which other forms of payment protections (such as litigation in the event of non-payment) can be difficult to obtain.
HOW DOES IT WORK?
A) Negotiation of the contract. Buyer and Seller agree on the terms of the contract. The Seller will be the CREDITOR (beneficiary) and the Buyer will be the DEBTOR (issuer).
B) Request for issuing the SBLC. The Buyer asks his bank to set up the SBLC. The issuer (Buyer) has to pay the fees to HIS bank for issuing the SBLC!
C) Or the SBLC is DIRECT to the Seller, or it is an INDIRECT SBLC, where the Buyer’s bank issues the SBLC to the bank of the Seller.
Activation of the SBLC:
In case of DEFAULT, the Seller notifies HIS bank with proof of non-performance (not paid invoice, proof of delivery of the goods, etc). The Seller’s bank forwards these documentations to the Buyer’s bank. The Buyer’s bank will do the payment.
WHAT IS THE COST OF ISSUE A SBLC?
When asking your bank for issuing and SBLC, your bank will ask fees for that. Depending on the type and conditions of the SBLC, the bank will charge between 1 till 10% of the face value (= the total amount of the SBLC). And all this depends on your relationship with the bank, your weight for that bank (value) and of course type and conditions of the SBLC. Once the fees are paid the SBLC well be issued. In the event that the business meets the contractual obligations prior to the due date, it is possible that the bank will not charge more fees. So please make sure that you know all these criteria before you start any procedure.
DIFFERENCE BETWEEN LC AND SBLC?.
A LC is paid when a contract if fulfilled. A SBLC is paid when a contract is NOT fulfilled.
So we can say that an SBLC is an LC with more documentary information and conditions. However, we cannot say and SBLC is a Documentary Letter of Credit (see our section of DLC’s) because the DLC depends on the performance by the supplier, whereas an SBLC depends on the NON-PERFORMANCE or DEFAULT on the part of the buyer.
WHAT CAN MS Financial Advice DO FOR YOU?
We can consult you to get an SBLC issued by your bank or another bank. But do understand just ONE thing! BANKS NEVER LOAN MONEY WHEN YOU HAVE NO COLLATERAL !!!! So do not ask us to help you to get an SBLC when you have NO money! However, you can get an SBLC already when you have only a partial of what you should need!
A) When you have all the money available to pay your supplier but only want to pay under the conditions of “an agreement” it is not a big deal to get an SBLC issued by your own bank.
B) When you do not have ALL the money available, you can buy a “fresh cut” (Financial) SBLC between 30-till 50%. Of course, conditions taken in consideration.
C) The third possibility is to buy, or better say to LEASE an SBLC. Again, have to check and take the conditions in consideration. Prices vary here in between 4 till 15%, depending on conditions.
MSFinAdvice can advise and consult in A) and with our network we can get you an SBLC for B) and C).
If you read a little bit in between the lines, and you are familiar with the financial world, it will not take long before you understand that the “business” of SBLC’s is a question of offer and demand. And knowing that, it takes us to the possibilities of “trading” SBLC’s! And because SBLC’s can have values of a couple of hundreds of millions, sometimes even billions, that means that there is a lot of money going on in this world of trading SBLC’s. And when there is a lot of money floating around, that ALSO means that there is A LOT OF SCAMS involved in this.
When you are not daily involved in this business it is NOT EASY to eliminate REAL from SCAM!
We get many calls from clients that ask to help on “advise” them on buying an SBLC of even more than 100.000.000 USD/EURO for just 150.000 or 200.000 €/$. Well I can tell you for sure that these are scams. And we have more of these ridiculous offers where unfortunately people are taken for granted every day.
On the other hand, we also receive clients that know the rules of the game “better than anyone else” and put their rules on the table to ask us to do it their way. Let us explain this: IT WILL NEVER WORK. You cannot tell a bank or Monetizer to do your way. Banks and Monetizer will laugh it away.
Is a SBLC TRANSFERABLE?
Yes a SBLC is transferable and exactly as a LC it allows the first beneficiary to transfer some or all of the credit to another party, which creates a secondary beneficiary. The party that initially accepts the transferable letter of credit from the bank is referred to as the first, or primary beneficiary.
A transferable SBLC is often used in business deals to ensure payment to the supplier or manufacturer. A transferable SBLC is an alternative option to advance payments.
A transferable SBLC permits an initial beneficiary to transfer some or all of the credit they are due to another party.
The parties involved in a transferable SBLC are the applicant (the buyer), the first beneficiary (the middleman), and the second beneficiary (the seller).
