STANDBY LETTER OF CREDIT (SBLC) AND HOW DOES AN SBLC WORK?

WHAT IS STANDBY LETTER OF CREDIT (SBLC)? SBLC PROCESS? AND HOW DOES AN SBLC WORK?

WHAT IS A STANDBY LETTER OF CREDIT?
Standby LCs are used as a form of guarantee to cover default by a Buyer; The Buyer pays directly for goods ordered and, only in the event of non-payment by the Buyer, does the Seller claim under the Standby LC. Standby LCs are used to support regular supply contracts with Exporters. The Importer arranges for their bank to provide the Exporter with a Guarantee that, in the event that goods have been shipped and the Exporter has not been paid, the Importer's bank will guarantee payment for a pre-determined amount.

STANDBY LETTER OF CREDIT PROCESS
1. The Applicant and Beneficiary agree on a sales contract. A Standby Letter of Credit would be required to support the Applicant’s payment obligations under such contract.

2. The Applicant completes an Application for Standby Letter of Credit requesting bank to issue an SBLC in favor of the Beneficiary.

3. Bank issues the Standby Letter of Credit and sends it to the Beneficiary’s Bank.

4. The Beneficiary’s Bank verifies the Standby Letter of Credit for authenticity and sends the original to the Beneficiary.

HOW DOES AN SBLC WORK?
Here’s a step-by-step process of how an SBLC works:

The process of obtaining an SBLC is fairly simple and similar to that of obtaining any other type of LC or a loan from a bank. A buyer simply walks into a bank or a financial institution and applies for an SBLC.

The bank then starts looking into the creditworthiness of the applicant and decides whether or not the person should be credited with the SBLC. The bank looks into the financial history of the applicant as well as their credit reports and ratings.

If the bank suspects that the buyer will not be able to honor the LC, they may ask for additional collateral to be provided. The size of the collateral depends on the risks as well as the nature of the business.

Once the buyer establishes sufficient creditworthiness, the bank asks for the details of the agreement between the buyer and the seller. Information such as the seller’s name and address, company details, the time period for which SBLC is to be taken as well as shipping documents, etc., are submitted to the bank.

Once the bank is satisfied with all the information at their disposal and their background checks have yielded satisfactory results, it provides an SBLC to the buyer. The bank charges 1% to 10% of the amount of SBLC as a yearly fee, and it’s applicable until the SBLC is valid.

If the buyer meets its obligations in the contract before the due date, the bank will terminate the SBLC without a further charge to the buyer. Once the buyer pays the seller for the goods or the services, the bank terminates the SBLC and doesn’t charge him beyond that point.

As discussed above, SBLC is not actually meant to be used and only acts as a security against default. It comes into action if the buyer is not able to honor the agreement with the seller, the seller goes to the bank and submits the proofs as mentioned in the SBLC. Once the bank verifies the proofs, they release the payment to the seller. The buyer then makes the payment to the bank at a later date along with interest.

Feel free to contact us for any further clarifications and assistance, we look forward to receiving your LOI/ICPO to begin cooperation.
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