What is 'Standby Letter of Credit (SBLC)'
We Uplaxya Consultants Pvt. Ltd. have a dedicated expertise Team that help Seller or Buyers of payment with a Banker’s Guarantee/Standby Letter of Credit. A standby letter of credit (SLOC or SBLC), also known as a standby or LOC, is a lender’s guarantee of payment to an interested third-party in the event the client defaults on an agreement. Standby letters of credit are formal documents that specify the duties and obligations of each party and serve as an act of good faith. The bank issuing the SLOC performs general underwriting duties to ensure the financial credibility of the party seeking the letter of credit. Then it sends a notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Reassure your buyer or seller of payment with a Banker’s Guarantee/Standby Letter of
Credit. In the event that you fail to fulfill your contractual obligations, we will honour payment
to your beneficiaries upon receipt of a claim that complies with the guarantee terms.
Obtaining a Standby Letter of Credit
A client, typically a business owner, requesting a standby letter of credit must prove to the bank that he/she is capable of repaying the loan. Collateral may be required to protect the bank in the event of default. The bank typically provides a decision in writing within one week of receiving final documentation to complete the processing of the client’s application. The client must pay a SLOC fee for each year that the letter is valid. The fee is typically 1-10% of the SLOC value. Provided the arrangement’s stipulations are met, the client is permitted to cancel the SLOC without incurring additional charges.
Types of Standby Letters of Credit
- Performance SLOC: Performance standby letters of credit ensure the nonfinancial contractual obligations (quality of work, amount of work, time, cost, etc.) are performed in a timely and satisfactory manner. If these obligations are not met, the bank will pay the third party in full.
- Financial SLOC : Financial standby letters of credit ensure financial contractual obligations are fulfilled. Most SLOCs are financial. Financial SLOCs are often 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
Benefits of SLOC
The standby letter of credit process is similar to that of obtaining a commercial loan, with a few key differences.
As with any business loan, you will need to provide proof of your creditworthiness to the bank. However, the SLOC approval process is much quicker, with letters often being issued within a week of all paperwork being submitted.
Unlike traditional loans, the bank will require a standby of letter of credit fee of between 1-10% of the SLOC amount before issuing the letter. This fee is usually charged per year that the letter of credit is in effect. If the terms of the contract are fulfilled early, you can cancel the SLOC without incurring additional charges
The exporter is protected from the risk of non-payment by the buyer. The importer is protected from the risk of unsatisfactory performance or non-performance of the contract by the other party.
Our teams of local and global specialists can guide you through every step of the import process. You get dedicated support from the Help with Uplaxya Consultants Pvt. Ltd. (UCPL).
Your goods are delivered more quickly, as the documents are sent to you directly without passing through the banking system. In case of default, the standby letter of credit allows the beneficiary to be paid promptly, provided the terms are satisfied.
You can plan your financial expenses in advance.
This is a guarantee rather than a payment instrument. It protects against the risk of default.
- It is more flexible than documentary credit. It releases the partners from the need to exchange extensive documentation through their banks.
- The funds drawn against an SBLC require documents to be submitted that satisfy the terms and conditions of the SBLC (e.g. a payment demand, certificate of non-payment, copy of the sales invoice, copy of the transport document, etc.)
Benefits of SLOC
A standby letter of credit (SLOC or SBLC), also known as a standby or LOC, is a lender’s guarantee of payment to an interested third-party in the event the client defaults on an agreement
A Standby Letter of Credit can be cancelled prior to expiry by having the beneficiary return the original Standby Letter of Credit to the Trade Finance Centre along with a letter printed on the beneficiary’s letterhead addressed to CIBC that agrees to the cancellation of the Standby Letter of Credit because it is no longer needed. If the Standby Letter of Credit is irrevocable, the applicant or the issuing bank cannot cancel or alter the Standby Letter of Credit without the express written approval of the beneficiary.
As the applicant of the Standby Letter of Credit, you should advise your Trade Finance Centre whether or not you want the Standby Letter of Credit renewed, well before the expiry date. Otherwise, the Standby Letter of Credit will continue to automatically renew and you will be charged the corresponding fees.
Usually, the Standby Letter of Credit will specify that the bank must advise the beneficiary if it will not be renewed, 30 or 60 days prior to expiry. Otherwise, it will be automatically extended for the period indicated in the Standby Letter of Credit.
The Standby Letter of Credit will automatically be renewed (usually for a period of 1 year) if the Trade Finance Centre does not receive your instructions. It will also be automatically renewed if the instructions are received but do not provide the Centre with sufficient time to give the required 30-60 day notice of non-renewal to the beneficiary, as indicated in the terms of the Standby Letter of Credit.
If the Standby Letter of Credit will automatically renew and you wish to cancel it, you must ask the beneficiary to return the original Standby Letter of Credit to the Trade Finance Centre for cancellation as per the requirements in question 5.
It is important to note that even if the advice of non-renewal is received in time by the beneficiary, the beneficiary still has the right to draw on the Standby Letter of Credit any time up to the expiry date provided the drawing is in compliance with the terms of the Standby Letter of Credit.