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What is a Standby Letter of Credit?

Trade Finance transactions are usually underpinned by a Documentary Letter of Credit or a Standby Letter of Credit (SBLC), however a SBLC is only used as a payment of last resort. Two parties, the buyer and the seller enter into a contract where the buyer instructs their banker to open a SBLC in favour of the seller, and if the buyer fails to pay the seller, under the Terms and Conditions of the SBLC, the sellers bank can claim reimbursement from the buyers bank.

The word leased in a Leased Standby Letter of Credit, is an incorrect reference to Collateral Transfer, which is the correct technical term for a Leased Standby Letter of Credit. A commercial leasing contract is very similar to a Leased Bank Guarantee transaction, and it is assumed this is where the term leased is derived. Although not be found in any banking reference book, the word leased is now part of everyday life in the world of Bank Guarantees, and Standby Letters of Credit.

Monetising a Standby Letter of Credit

Despite underpinning Trade Finance transactions, the SBLC has become a popular instrument for monetisation. However, when using a SBLC as a medium for monetisation, the verbiage has to be exact, and accordingly resembles the verbiage of a Demand Bank Guarantee, which governed by ICC Uniform Rules for Demand Guarantees, (URDG 760), and as such so is the Standby Letter of Credit. Accordingly, beneficiaries of a Leased Standby Letter of Credit can now approach their bankers and request a capital injection, a loan or a line of credit, often alluded to as Credit Guarantee Facilities.

The transaction methodology of the Leased Bank Guarantee is virtually similar to that of a Leased Standby Letter of Credit and is where two companies enter into a contract, the owner of the instrument, (the Provider), gives instructions to their bank, (The Issuing Bank), to temporarily transfer a SBLC favouring another company, (the Beneficiary), for credit to their account with their bank, (the Beneficiary). On expiry of the asset, the ownership reverts to the Provider.

When presented with a choice of monetising a Bank Guarantee or a SBLC, many companies choose the Bank Guarantee as it is the preferred option of monetisers because a Bank Guarantee is non-transferable. The LTV, (Loan to Value), however is dependent on the contingent liability, of the underlying transaction.

A Standby Letter of Credit and a Documentary Letter of Credit (DLC), whilst both a means of payment, have certain differences one of which is that under a SBLC, payment is conditional on non-performance of the buyer, whereas under a Documentary Letter of Credit, payment is conditional on the performance of the seller. However, when a SBLC is monetised, like a Bank Guarantee, it becomes a guarantee of payment.

IntaCapital Swiss, have for years been providing access to loans and lines of credit, also known as Credit Guarantee Facilities.

By making available their hugely popular Credit Guarantee Facility, that utilises Bank Guarantees and SBLC, companies who have been starved of credit facilities now have access to loans and lines of credit.