Standby Letters Of Credit

Standby Letters Of Credit

Global trade can be financed with a ‘Standby Letter of Credit (SBLC)’ which is known as ‘Standby LC SBLC’ / MT760.

We facilitate your international trade by providing a MT760 thereby guaranteeing payment to the selling agency (Client-B) on behalf of the sourcing agency (Client-A).

The requirement is sent to us by the sourcing agency (Client-A). The letter has to be supported by either a duly filled up invoice or a MOU of sale-purchase between Client-A and Client-B. It gives a tentative valuation of the deal being undertaken.

Apply For Standby Letters Of Credit

Relevance of Standby Letters Of Credit.

What Is Standby Letter of Credit ?

A formal approval from our side requires a due diligence to be carried out about the genuineness of the proposed transaction. We charge a fee for the activity (usually 20% of the proposed deal).

We draft a service agreement between Client-A and ourselves (Client-C).

We proceed to activate the SBLC once the service agreement is signed by both Client-A and Client-C. Client-A has to share the relevant documents to be presented to an identified Bank, which then issues the SBLC within 2 banking days.

SBLC-MT760 came into being to introduce a sturdier payment method. The risk of default gets mitigated by activating the SBLC between the Client-A and Client-B. The payment is materialized as soon as the selling is confirmed. An intermediate arrangement of securitization is to be in place till the payment reaches the source to the target (the advisory bank from the seller side).

A Standby Letter of Credit comes into action, which is a promissory note of the buyer’s worth. It is useful when goods are transacted, and payment is ensured thereof. SBLC-MT760 can be treated as a means for credit enhancement, without channeling precious equity for the same. This way, it gives an expanded cash-flow scenario helping other business activities, without involving any cash transaction.

The involved parties in the transactions are: a) the sourcing/buying/importing agency who is the applicant, b) the selling/exporting agency who will receive the payment c) the issuing bank and d) the advising bank. </p

Benefits of the Standby Letter of Credit involve the following

• The Oder cannot be altered or cancelled by the buyer it is effective, thereby de-risking production.

• The Buyer’s bank is responsible for the payment of the goods, after the seller agrees about the terms of the deal.

• A credit period is granted to the buyer/importer subsequent to the assurance from the seller.

• The seller’s Bank is responsible for keeping an eye on the payment to the seller is duly received.

We can service our clients with the SBLC /MT760 even in case of inadequate Bank arrangements. Transparency is our trademark.

Standby Letter of Credit is a protection against bad payment during a transaction as a backup plan to ensure payment for shipment of goods or material/ fee for a completed service/ repayment of trade loans/delivery of goods through an open account basis/securing payment for goods/ services delivered by third parties.

SBLC (It is referred as ‘SOLC’ as well), as the Stand By Letter of Credit is famously known; is a payment guarantee which is issued by a Bank/financial institution which collects a service fee from the buyer; in favour of a seller to get payment for both commercial and financial transactions.

SBLC is a direct guarantee of the issuing bank to pay the seller in case of default on the part of the buyer in clearing the payment.

It is an instrument very handy in case of small business when fund raising is a challenge during the start-up phase when lot of opportunities might get by in the absence of a little capital requirement. But SBLC is a powerful contractual and financial tool which also carries larger weight than the cash because of the confidence of the Bank, and is never meant to be used.

However, SBLC is meant to be a guarantee cover in case of unforeseen circumstances like company going insolvent or facing a cash flow issue.

In essence, a standby letter of credit is a document in favour of a "beneficiary" issued by a bank, which is a non-beneficiary third party. It implies that the Bank pays in case the customer fails to pay, with provisions to recover it from the customer with a pre-guarantee mechanism. </p

Instances of use of SBLC/SLOC

Financial SBLC/SLOC: ‘the buyer/customer/importer (Client-A) has a fixed deposit with the bank in the form if a collateral, from which the bank pays the seller/exporter (Client – B), in case of default by the Client –A. The bank holds a ‘Standby Letter of Credit SBLC’ on behalf of Client-A, after evaluating the status of liquidity and credit-worthiness of Client –A, at the beginning of such a transaction between both parties, so as to be able to come into action at the required time.

Performance SBLC/SOLC: In case of a construction assignment, this is from the contractor in favour of the customer, to be paid in case of incomplete construction in time. It acts as a penalty instrument so as to facilitate another contractor to take over to complete half-completed projects.

Bank fee can be up to 10% of the securitized amount (Amount of transaction).

The Process Of Standby Letters Of Credit

Ramesh and Suresh are to business people involved in a variety of activities. Ramesh, an importer buys a shipment of goods from Suresh with an open credit. Ramesh is also involved in the construction business, which is to build a mall for Suresh by next year.

Suresh asks Ramesh to obtain a letter of credit as part of their agreement so that the organizations are protected from unforeseen circumstances me the form of default.

Ramesh applies in his bank for a standby letter of credit. The bank issues the letter considering his excellent?credit history?and the security deposit as collateral.

Ramesh’s bank sends the letter to Suresh’s bank.

Suresh along with his bank, review the letter of credit to be adequate for the deal and decides to proceed with the deal.

Should Ramesh fails to meet his obligations, then the idea is to submit documentation to Ramesh’s bank on the part of Suresh as per the letter of credit (The Bank of Suresh can be any Bank with which Suresh is comfortable with the service and attitude).

If Ramesh’s bank pays Suresh, then this will be recovered from Ramesh deducted from Ramesh’s collateral.

The circumstances when the Standby Letters of Credit comes to play

There are various reasons why there could be a payment default so as to warrant the protective mechanism of SBLC.

The buyer at times might have a liquidity crisis because of delayed payment from another transaction the buyer was involved in.

The buyer’s business fails if some political disturbance makes freezing of buyer’s assets. The buyer is to be satisfied with the seller’s delivery/service. The buyer has fraudulent motives.

While eternal circumstances can affect the business partnerships, businesses, cash flow etc., the bank remain stable, irrespective of unrest. It is consistent to the agreement between two players made once till the duration of the contract.

It is wise for the buyer to go for a standby letter of credit in favour of the seller with legitimate procedure followed as per the bank’s requirements.

A confirmed letter of credit can be issued to the beneficiary in case there is a worry about the bank’s financial stability, with the guarantee of another bank with secured business.

Differences between a Standby Letter of Credit and Other Letters of Credit

The first difference is the ‘Backup plan’, wherein there is a payment happening. Being a safety net, the letter is never supposed to be brought to action. Although it implies problem in the business cash flow, the payment does take place in any case.

Performance aspect can be included in addition to the payment with normal transaction, whereby .

a?negative?performance parameter is introduced resulting in non-payment for unsatisfactory delivery of services.

Standby letters of credit are meant for ‘in-country’ transactions while Commercial Letters of credit are usually involved in the international trade.

One approaches the commercial division or international trade department of a bank for the letter to be issued. The buyer needs to understand thoroughly about the circumstances where payment becomes mandatory. It may be helpful to engage an attorney to develop clear understanding.

An irrevocable letter of credit is where payment is made mandatory. Specialised people are required to be engaged to understand the intricacies of the Letters of credit; with minor requirements which are difficult to fulfil in which case the right to receive payment gets is sabotaged.

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