People often confuse between a Standby Letter of Credit (SBLC) and a Bank Guarantee. Before seeking startup business loans, loan lenders should know the difference to ensure they have real information.
What is SBLC?
SBLC is an agreement that safeguards in case of nonpayment by either of the parties mentioned in the contract. In other words, it is a document issued by the bank guaranteeing payment on your, the client’s, behalf. The bank also confirms that the agreed-upon collateral is held within the account of the client. When the client purchases an instrument, the Providers Capital cuts it back.
You can either purchase or lease SBLC.
Business Finance And Startup Business Loans Using SBLC
SBLC can be a financial aid for your business; typically for people looking to startups and expand their business. It is the quickest and safest way to get some fast cash when your business needs it the most. SBLC, when monetized, can be used to trade. It could be a lucrative alternative to finance your business, as you may not need a lender. You are likely to receive the funds in tranches, which is a great way of managing business capital.
Role Of Banks In SBLC Transactions
Technically, banks do not have any role in issuing SBLC. Instead, banks act as the deliverer of the transaction and not the initiator. Banks confirm that their client has an adequate fund.
In this case, the bank works as a delivery agent. They receive documented financial instruction from the provider to deliver an asset (SBLC) to the Receiver’s bank.
How To Find Genuine SBLC Providers
It may be challenging to find a genuine SBLC provider. Banks do not advertise SBLC as their product because they are not authorized to do so.
Only clients with high net worth and large cash holdings can provide SBLC. Some common examples of such clients are hedge funds, large corporations, pension funds, private equity, etc. However, it could be extremely difficult to get in touch with them.
Genuine and legit SBLC providers perform several checks and balances. This means all authorized mandate agents that are connected to the SBLC providers should adhere to strict procedures.
Of course, it is a piece of good news, as they are certain that they are only connecting with clean businesses.
How Do SBLC Work?
When any XYZ company completes the forms to lease SBLC, they are essentially borrowing collateral. It is also called a temporary Collateral Transfer Agreement (CTA). With this agreement, you need not do your transactions through your account directly. You can use the SBLC provider’s account to apply through the bank.
SBLC is commonly used for the following purposes:
- Trader & commerce, i.e. to purchase goods
- To back credit lines
- Project funding
Requirements for SBLC Document Application
When leasing any bank instrument, both parties must sign the Deed Of Agreement (DOA). The DOA states clearly that the owner of the title is leasing SBLC for a year and one day at USD 100M refunding with no encumbrance or liens.
Both banks shall send Ready Willing and Able (RWA) messages to one another. The provider’s bank shall confirm its readiness to issue SBLC and the receiver’s bank shall confirm that the client has funds.
Once the DOA and RWA are inked and the SWIFT fees are paid, banks of both the parties shall message one another until the bank instrument is transmitted to the receiver. Some agreements state that should a party fail to meet the mentioned timeline, there shall be a penalty as well as the risk of no further business.
SBLC Lease – How To Go About It
You can apply for the SBLC lease in two ways:
- Apply for SBLC with the bank
- Use authorized agents and fill the Deed of Agreement (DOA)
The providers’ bank would immediately send a Ready, Willing, and Able Letter on the client’s behalf.
The receiving bank sends RWA on the receiver’s behalf. SWIFT fees are called upon and SWIFT messages are further exchanged between the banks until the time the SBLC is issued. The SBLC document, a hard copy, is then sent to the beneficiary.
SBLC Purchase
The process of purchasing SBLC is the same as leasing. However, the only difference is that you are the owner of the instrument. For instance, the provider here is the owner of the asset, the asset holder and the asset controller. When you purchase SBLC, the title of foods is immediately transferred to your/company name.
The only added advantage of purchasing SBLC is that you are authorized to lease it when you want to.
