25 Sep Standby Letter Of Credit (SBLC/SLOC) Overview

Standby Letter Of Credit (SBLC/SLOC)

Standby Letter of Credit (SBLC) overview

Issued by: Grand City Investment Limited

What is an SBLC?

A Standby Letter of Credit (SBLC) is a bank-issued payment guarantee that serves as a safety net for businesses, ensuring payment if a client fails to meet contractual obligations. It acts as a testament to a buyer’s creditworthiness and is often utilized in various financial transactions. The bank conducts a brief assessment of the applicant’s credit before issuing the SBLC to the beneficiary, typically a seller or creditor.

A standby letter of credit shows a company’s credit quality and ability to repay loans. Although a SBLC is not intended for use, it helps fulfill business obligations in case the business stops operations, cannot pay its vendors or becomes insolvent.

Small businesses often face difficulty when securing financing. For this reason, standby letters of credit may be especially beneficial for encouraging investors to lend money to a company. In case of default, investors are assured they will be paid principal and interest from the bank through which the SBLC is secured.

Standby Letters of Credit are issued for use in a wide variety of commercial and financial operations. Standby letters of credit are very much alike documentary letters of credit, their main difference is that unlike DLC’s, they only become operative in case the applicant defaults, then the beneficiary in whose favor the SBLC was issued, can draw on the SBLC and demand payment.

Purpose of SBLC

SBLCs provide reassurance to investors and creditors, particularly for small businesses struggling to secure financing. In the event of default, the bank guarantees repayment, helping to facilitate smoother business transactions. Unlike documentary letters of credit, SBLCs only become active upon default.

Historically, Standby letters of credit were developed because the US regulator legally limited US bank’s authority to issue guarantees.

When requesting a SBLC, a business owner proves to the bank he is capable of repaying the loan. Collateral may be required to protect the bank in case of default. The bank typically provides a letter to the business owner within one week of receiving documentation. The business owner must pay a SBLC fee for each year that the letter is valid. The fee is typically 1–10% of the SBLC value. If the business owner meets the criteria outlined in the contract before the due date, the business owner can cancel the SBLC without further charges.

Key Features of SBLC

• Payment Guarantee: Provides a payment guarantee to the beneficiary if the applicant defaults.
• Types of SBLCs:
  1. Performance SBLC: Ensures obligations beyond monetary payments are met.
  2. Advance-Payment SBLC: Covers advance payments made by suppliers.
  3. Bid Bond: Supports the buyer’s obligation to execute a contract if awarded a bid.
  4. Financial SBLC: Guarantees funds repayment obligations.
  5. Commercial SBLC: Ensures payment for goods/services in case of non-payment by other methods.

How SBLC Works

1. Request Submission: The beneficiary submits a signed Letter of Intent (LOI) along with required documentation.
2. Due Diligence: The bank conducts due diligence and notifies the beneficiary of the approved contract amount.
3. Application Process: The beneficiary completes the SBLC application and accepts the terms.
4. Issuance: After all approvals, the SBLC is issued via the SWIFT network.
5. Payment: Upon activation, the beneficiary’s bank pays the principal based on the agreed terms.

General Provisions & Conditions

• Confidentiality: Parties must not contact each other’s banks without permission, leading to immediate transaction cancellation if violated.
• Legality: The agreement is governed by applicable domestic laws and may involve arbitration for dispute resolution.
• Indemnity: Each party indemnifies the other against claims arising from the transaction.

SBLC TRANSACTION PROCEDURE

Instrument & Service Description
A Bank Guarantee (BG) is the name used mostly in Europe and Standby Letter of Credit (SBLC) is exactly the same, but used in the USA. Since we are working globally you will see the expression BG/SBLC in our documents.

Our Purchased Bank Guarantees — Owned, are issued by World’s Top 25 Banks. We use the Bank SWIFT Network to have clients’ Owned Bank Guarantees (BG) delivered Bank to Bank using SWIFT MT799 followed by SWIFT MT760. We operate a reliable, efficient delivery and authentication process.

BG-SBLC Transaction Procedures and General Provisions

1. Submission by Beneficiary

The beneficiary must submit the following documents to the principal:

• 1.1 Signed BG-SBLC Letter of Intent (LOI)
• 1.2 Client Information Sheet (CIS)
• 1.3 Statement of Non-Solicitation of Funds
• 1.4 Irrevocable Fee Protection Agreement covering all identified beneficiaries for both parties
• 1.5 Clear color copy of the beneficiary signatory’s passport
• 1.6 Certificate of Incorporation

2. Due Diligence Approval

Upon successful completion of due diligence, the beneficiary will receive:

• A written email confirming the approved SBLC contract amount and tranche schedule (ranging from €5 million to €500 million).

3. SBLC Application Template

After approval, the beneficiary will receive an SBLC application template from the investment banker. This template will include:

• a. Approved contract amount
• b. SBLC tranche schedule
• c. Beneficiary CIS and passport

4. Completion of BG-SBLC Application

The beneficiary must complete the application statements:

• a. Accepting the SBLC price
• b. Confirming bank acceptance of the corporate invoice
• c. MT799 BPU declarations

The completed application must be returned on the beneficiary’s letterhead via email to the investment banker.

5. Funding Deed of Agreement (DOA)

Following successful due diligence and BG-SBLC application submission, the provider will prepare a DOA for countersigning.

6. Lodging the DOA

After signing, both parties may lodge the funding DOA with their respective banks. This signed DOA becomes a legally binding contract between the parties.

7. Corporate Invoice

The principal will issue a corporate invoice to the beneficiary’s bank, detailing the all-inclusive BG-SBLC price and commission. The beneficiary’s bank will confirm readiness to receive the BG-SBLC via MT199.

8. Pre-Advice Issuance

Within three banking days, the principal’s bank will issue pre-advice via SWIFT MT799, confirming delivery against the issuance of BPU via MT799 by the beneficiary’s bank.

9. SBLC Delivery

Within five banking days after receiving and authenticating the BPU, the principal’s bank will deliver the SBLC via SWIFT MT760.

10. Activation of BPU

Within seven banking days after the SBLC is authenticated, the beneficiary’s bank will activate the BPU and remit payment to the principal via SWIFT MT103. Hard copies of the SBLC will be couriered to the beneficiary’s bank within seven days post-payment.

11. Payment Terms

The beneficiary shall pay an all-inclusive fee (XX% + 2%) of the face value of each tranche, as per the irrevocable fee protection agreement.

12. Subsequent Tranches

All subsequent tranches will follow the same procedures until the agreed contract amount is fulfilled or the collateral or funds are exhausted.

13. Unauthorized Communication

Any unauthorized bank communications or solicitations will result in immediate cancellation of the transaction and potential damages.

General Provisions & Conditions

1. Communication Restrictions
   Parties are prohibited from contacting each other’s banks without written permission. Violations will result in transaction cancellation and potential damages.
2. Binding Agreement
   Upon countersigning the DOA, it becomes a legally binding contract. Failure of the beneficiary’s bank to issue the required SWIFT within seven days will result in cancellation.
3. Default Consequences
   If the beneficiary defaults on payment, the principal may instruct the issuing bank to reclaim the BG/SBLC.
4. Authority Representation
   Each party warrants full authority to enter into this agreement.
5. Non-Circumvention and Non-Disclosure
   The ICC’s Non-Circumvention/Non-Disclosure rules apply for five years from execution. All information is privileged and remains the property of the originating party.
6. Governing Law
   The agreement is governed by UK law. Disputes not resolved amicably will be settled under ICC arbitration in Paris.
7. Assignment of Interests
   Neither party may assign rights without prior written consent. Modifications must be in writing.
8. Severability
   If any provision is invalid, the remainder of the agreement remains effective.
9. Tax Responsibilities
   Each party accepts responsibility for applicable taxes.
10. Indemnification
    Each party indemnifies the other against claims arising from this agreement for three years post-completion.
11. Private Transaction Confirmation
    Both parties confirm that this transaction is private and not a solicitation of funds.
12. Entire Agreement
    This document embodies the complete understanding between the parties, superseding any prior agreements.
13. Counterparts
    This agreement may be executed in counterparts and transmitted electronically.
14. Read and Understood
    Parties acknowledge they have read and understood the agreement.
15. Acknowledgment of Non-Solicitation
    The beneficiary confirms that no solicitation has occurred.

IMPORTANT: Transaction procedures and terms may change. Please contact us for the latest updates.