Bank Securities for Trade 

Standby Letter of Credit (SBLC) – A Comprehensive Overview

A Standby Letter of Credit (SBLC) is a powerful financial instrument used in international trade and finance, providing a guarantee from a bank that ensures the obligations of the buyer or seller are met. Typically, SBLCs are used as a safety net in transactions where one party needs to reassure the other that the agreed-upon terms will be fulfilled. This instrument is highly valued for its ability to mitigate risks in international trade by acting as a guarantee for payment and performance.

The validity period of the SBLC is generally 12 months, offering flexibility and security for both parties involved in the transaction. It can range from a minimum of $5 million to $100 million, making it suitable for a variety of large-scale business dealings. The SBLC assures the recipient that if the applicant (the buyer) defaults on the agreement, the bank will step in and cover the financial obligations, safeguarding the interests of the other party.


The Collateral Transfer Process: SWIFT Communication
The collateral transfer between the issuing and receiving banks takes place through secure banking channels using SWIFT communication. SWIFT, which stands for the Society for Worldwide Interbank Financial Telecommunication, is a globally trusted network that allows for the secure transfer of financial messages and data between banks. The use of SWIFT ensures that the transaction is executed smoothly and efficiently while maintaining the confidentiality of sensitive information. This process provides a high level of security, ensuring that both parties can trust the terms of the agreement.


Bank Requirements and Credit Rating
To qualify for an SBLC, the borrower (also known as the client) must maintain a business banking relationship with a financial institution that holds an acceptable credit rating. Specifically, the bank must have a credit rating of “A” or higher, demonstrating financial stability and reliability. The issuing bank will assess the financial standing of the borrower, including their assets, history of creditworthiness, and overall financial health.

Additionally, the borrower’s bank must have SWIFT connectivity, which enables the smooth and secure transfer of financial instruments like the SBLC. This connectivity ensures that the issuing bank can effectively communicate with the receiving bank and handle the transfer of collateral efficiently, reducing the risk of errors and delays.


The Role of Third-Party /Corporate Investors
In certain instances, Corporate / third-party investors are involved in the SBLC transaction to provide additional support and security. These investors pledge their assets as collateral for the SBLC. This collateral is then transferred through the investor’s own bank, which is where the investor holds their business banking relationship. This arrangement allows the investor to back the SBLC without directly involving the borrower’s assets, adding an extra layer of protection to the transaction.

The third-party investor’s involvement in the SBLC process enhances the credibility and reliability of the agreement. This is especially useful when the borrower’s assets are insufficient to meet the required collateral or when a more substantial guarantee is needed to reassure the parties involved in the trade.

Issuing Bank Fees and Termination of the SBLC
The issuing bank charges an annual service fee for providing the SBLC, typically ranging between 5% and 12% of the face value of the financial instrument. The exact fee percentage depends on various factors, including the borrower’s financial profile, the perceived risk of the transaction, and the terms set forth by the issuing bank. This fee is paid annually, and the SBLC remains valid for a duration of 12 months.

However, if the buyer fulfills their obligations before the due date, the bank may terminate the SBLC without any additional charges. This provision helps reduce the financial burden on the borrower and incentivizes timely performance in the business transaction. Termination of the SBLC before the expiration date can result in cost savings for the borrower and allow for smoother future transactions.


Eligibility for SBLC Facility
To be eligible for an SBLC, the borrower or client must meet certain criteria set by the issuing bank. These include having a solid asset base, a profitable audited balance sheet, and a well-defined business plan. The borrower must be in a position to execute the business plan effectively and manage the financial obligations tied to the SBLC.
A borrower who qualifies for an SBLC typically has a well-established business with a positive financial track record. They are required to demonstrate that their company is not only financially sound but also able to repay the financial obligations outlined in the SBLC agreement. The issuing bank will review the borrower’s financials, including their debt-to-equity ratio, cash flow projections, and any other relevant financial data.
In addition to these requirements, the borrower must contribute initial capital between 5% to 10% of the total funds required. This capital serves as a demonstration of the borrower’s commitment to the project and willingness to invest in the business transaction. The remaining funds, which may range from $5 million to $100 million, are provided through the SBLC arrangement, offering the borrower the necessary financial backing to execute their business plan.


The Final View
The Standby Letter of Credit (SBLC) is a vital tool in international trade, offering security and confidence to both parties involved in high-value transactions. Through the use of secure banking channels such as SWIFT communication, the SBLC ensures that the buyer’s obligations will be met, providing peace of mind to the seller. The involvement of third-party investors, along with the flexibility in service fees and termination clauses, further strengthens the financial protections offered by the SBLC.
For businesses with a strong asset base, a solid audited balance sheet, and a clear business plan, the SBLC facility provides a valuable means of securing large-scale financing for global projects. It is an essential instrument for companies looking to expand their international trade capabilities and minimize financial risks, all while ensuring the successful execution of their business strategies.