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Can an SBLC be monetized ? 

 

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The short answer is YES, But, there are some questions you need to answer before moving forward.

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1) Are you in possession of the SBLC instrument ?

2) Do you have legal documents giving you control own the SBLC ?

3) Has the SBLC been fully paid for before requesting if you can monetize it ?

4) Is the SBLC Unencumbered ?

5) What is the callable or verifiable?

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if you answer YES to all these questions, then your lease SBLC can be monetized either by selling it in its entirely or by taking out a RECOURSE OR NON-RECOURSE LOAN, depends on purpose  / country

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How long does it take to monetize an SBLC ?

Monetizing an SBLC takes approximately 5 to 15 days

if it involves converting the instrument into Cash Fund, which can be done through a variety of financial instruments and procedures. 

The exact timeline can depend on various factors, such as the complexity of the transaction between the parties involved, and the compliance requirements that need to be met.  During the monetization process SBLC will be reviewed by monetize (R) who confirm its authenticity.

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Once the SBLC is verified the monetized will offer a Loan Amount based on Percentage of (%) of SBLC

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The client or owner of SBLC can choose either to sell SBLC out rate or takeout Recourse Loan / Non-Recourse loan against it. (And an option to enter into Trade platform with USD 1.00 MN Onwards. 

 

 Its impotent to know before proceeding with SBLC monetization the owner of SBLC must have  legal control over the instrument it must be fully paid and it must be unencumbered and verifiable.

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Depends on the transaction, the client must deposit Refundable deposit to Monetizer once the agreement executed.
 

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The process of issuing SBLC involves following steps

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The client contact the bank or SBLC provider to request for SBLC - (Third party Instrument issued by Provider only)

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Jade Corporate advisor start with pre-qualification check to know more about, KYC, Corporate Information, Purpose of Credit enhancement with country specific requirements, etc., with a consulting fee to be paid UPFRONT.

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Once reviewed the borrower information, the same can be discussed with SBLC providers to get a QUOTE / term sheet to connect with Borrowerr

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Borrrower need to review the provided Deed of Agreement / LOI / Monetizing Agreements etc., to take next step.

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The procedues follow as per the signed agreement between SBLC provider and borrower.

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WHAT IS A STANDBY LETTER OF CREDIT (SBLC)?

A standby letter of credit (SBLC) is a legal document that guarantees a bank's commitment of payment to a seller if the buyer–or the bank's client–defaults on the agreement. A standby letter of credit helps to facilitate international trade between companies that do not know each other that has different laws and regulations. Although the buyer is certain to receive the goods and the seller certain to receive payment, a SBLC does not guarantee that the buyer will be happy with the goods. A standby letter of credit can also be abbreviated as SBLC.


HOW A STANDBY LETTER OF CREDIT WORKS

A SBLC is most often sought by a business to help it obtain a contract. The contract is a "standby"  agreement because the bank will have to pay only in a worst-case scenario. Although an SBLC guarantees payment to a seller, the agreement must be followed exactly. For example, a delay in shipping or a misspelling a company's name can lead to the bank refusing to make the payment.

There are two main types of standby letters of credit:

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A financial SBLC guarantees payment for goods or services as specified by an agreement.  An oil refining company, for example, might arrange for such a letter to reassure a seller of crude oil that it can pay for a huge delivery of crude oil.

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The performance SBLC, which is less common, guarantees that the client will complete the project outlined in a contract. The bank agrees to reimburse the third party if its client fails to complete the project

IMPORTANT NOTE: The recipient of a standby letter of credit is assured that it is doing business with an individual or company that can pay the bill or finishing the project.

The procedure for obtaining a SBLC is like an application for a loan. The bank issues it only after appraising the creditworthiness of the applicant.  In the worst-case scenario, if a company goes into bankruptcy or ceases operations, the bank  issuing the SBLC will fulfil its client's obligations. The client pays a fee for each year that the letter  is valid. Typically, the fee is 10% to 12% of the total obligation per year.


ADVANTAGES OF A STANDBY LETTER OF CREDIT

The SBLC is often seen in contracts involving international trade, which tend to involve a large commitment of money and have added risks or the business that is presented with a SBLC, the greatest advantage is the potential ease of getting out of that worst-case scenario. If an agreement calls for payment within 30 days of delivery and the payment is not made, the seller can present the SBLC to the buyer's bank for payment. Thus, the seller is guaranteed to be paid. Another advantage for the seller is that the SBLC reduces the risk of the production order being changed or cancelled by the buyer. 

An SBLC helps ensure that the buyer will receive the goods or service that's outlined in the document. For example, if a contract calls for the construction of a building and the builder fails to deliver, the client presents the SBLC to the bank to be made whole. Another advantage when involved in global trade, a buyer has an increased certainty that the goods will be delivered from the seller.

Also, small businesses can have difficulty competing against bigger and better-known rivals. An SBLC can add credibility to its bid for a project and can often help avoid an upfront payment to the seller.


WHAT IS A BANK GUARANTEE?

A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

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• A bank guarantee is when a lending institution promises to cover a loss if a borrower  defaults on a loan.

• Parties to a loan choose direct guarantees for international and cross-border transactions.

• The guarantee provides additional risk to the lender, so loans with such a guarantee will come with greater costs or interest rates.

UNDERSTANDING BANK GUARANTEES

A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan. The guarantee lets a company buy what it otherwise could not, helping business growth and promoting entrepreneurial activity.

There are different kinds of bank guarantees, including direct and indirect guarantees. Banks typically use direct guarantees in foreign or domestic business, issued directly to the beneficiary. 

Direct guarantees apply when the bank’s security does not rely on the existence, validity, and enforceability of the main obligation.

Individuals often choose direct guarantees for international and cross-border transactions, which can be more easily adapted to foreign legal systems and practices since they don't have form requirements Indirect guarantees occur most often in the export business, especially when government agencies or public entities are the beneficiaries of the guarantee. Many countries do not accept foreign banks and guarantors because of legal issues or other form requirements. With an indirect guarantee, one uses a second bank, typically a foreign bank with a head office in the beneficiary’s country of domicile.

IMPORTANT NOTE: A bank guarantee is when a lending institution promises to cover a loss if a borrower defaults on a loan.

EXAMPLES OF BANK GUARANTEES
Because of the general nature of a bank guarantee, there are many different kinds:

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• A payment guarantee assures a seller the purchase price is paid on a set date.

• An advance payment guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract. 

• A credit security bond serves as collateral for repaying a loan.

• A rental guarantee serves as collateral for rental agreement payments.

• A confirmed payment order is an irrevocable obligation where the bank pays thebeneficiary a set amount on a given date on the client’s behalf.

• A performance bond serves as collateral for the buyer’s costs incurred if services orgoods are not provided as agreed in the contract.

• A warranty bond serves as collateral ensuring ordered goods are delivered as agreedexample, Company A is a new restaurant that wants to buy $3 million in kitchen equipment.  For the equipment vendor requires Company A to provide a bank guarantee to cover payments before they ship the equipment to Company A. Company A requests a guarantee from the lending institution keeping its cash accounts. The bank essentially consigns the purchase contract with the vendor.

USES OF BANK GUARANTEES (BG) AND HOW TO GET ONE?
A bank guarantee serves as a promise from a commercial bank that it will assume liability for a particular debtor if its contractual obligations are not met. In other words, the bank offers to stand as the guarantor on behalf of a business customer in a transaction. Most bank guarantees carry a fee equal to a small percentage amount of the entire contract, normally 0.5 to 1.5 percent of the guaranteed amount. 


APPLYING FOR A BANK GUARANTEE
Bank guarantees are not limited to business customers; individuals can apply for them as well. However, businesses do receive most guarantees. In most cases, bank guarantees are not particularly difficult to obtain.

To request a guarantee, the account holder contacts the bank and fills out an application that identifies the amount of and reasons for the guarantee. Typical applications stipulate a specific period for which the guarantee should be valid, any special conditions for payment and details about the beneficiary.

Sometimes the bank requires collateral. This can be in the form of a pledge agreement for assets, such as stocks, bonds, or cash accounts. Illiquid assets are generally not acceptable as collateral


HOW BANK GUARANTEES WORK AND WHO USES THEM

There are several different kinds of bank guarantees, including:

 

•  Performance guarantees

•  Bid bond guarantees.

•  Financial guarantees

•  Advance or deferred payment guarantees.

Bank guarantees are often part of arrangements between a small firm and a large organization—
public or private. The larger organization wants protection against counterparty risk, so it 
requires that the smaller party receive a bank guarantee in advance of work. A variety of parties 
can use bank guarantees for many reasons:

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• Assure a seller that a purchase price will be paid on a specific date.

• Function as collateral for reimbursing advance payment from a buyer if the seller does not supply the specified goods per the contract.

• A credit security bond that serves as collateral for repaying a loan.

• Rental guarantee that serves as collateral for rental agreement payments.

• A confirmed payment order is an irrevocable obligation, in which a bank pays the beneficiary a set amount on a given date on the client’s behalf.

• Performance bond that serves as collateral for the buyer’s costs incurred if services orgoods are not provided as contractually agreed.

• Warranty bond that functions as collateral, ensuring ordered goods are delivered, as agreed.

DIFFERENCES BETWEEN BANK GUARANTEES AND LETTERS OF CREDIT
Letters of credit are usually used in international trade agreements, while bank guarantees are often used in real estate contracts and infrastructure projects. Bank guarantees represent a much more significant commitment for banks than letters of credit. A  bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary; however,  unlike a letter of credit, the sum is only paid if the opposing party does not fulfil the stipulated  obligations under the contract. This can be used to essentially insure a buyer or seller from loss or  damage due to non-performance by the other party in a contract


WHAT IS A LETTER OF CREDIT?
A letter of credit, or "credit letter" is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. If the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility.

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a particularly important aspect of international trade.

 

• A letter of credit is a document sent from a bank or financial institute that guarantees that a seller will receive a buyer's payment on time and for the full amount.

• Letters of credit are often used within the international trade industry.

• There are many different letters of credit including one called a revolving letter of credit.

• Banks collect a fee for issuing a letter of credit

HOW A LETTER OF CREDIT WORKS
Because a letter of credit is typically a negotiable instrument, the issuing bank pays the beneficiary, or any bank nominated by the beneficiary. If a letter of credit is transferable, the beneficiary may assign another entity, such as a corporate parent or a third party, the right to draw.

IMPORTANT NOTE: Banks typically require a pledge of securities or cash as collateral for issuing a letter of credit.

Banks also collect a fee for service, typically a percentage of the size of the letter of credit. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions. There are several types of Letter of Credit.

COMMERCIAL LETTER OF CREDIT

This is a direct payment method in which the issuing bank makes the payments to the beneficiary. In contrast, a standby letter of credit is a secondary payment method in which the bank pays the beneficiary only when the holder cannot.

REVOLVING LETTER OF CREDIT
This kind of letter allows a customer to make any number of draws within a certain limit during a specific period.

TRAVELER'S LETTER OF CREDIT
For those going abroad, this letter will guarantee that issuing banks will honour drafts made at certain foreign banks.

CONFIRMED LETTER OF CREDIT
A confirmed letter of credit involves a bank other than the issuing bank guaranteeing the letter of credit. The second bank is the confirming bank, typically the seller’s bank. The confirming bank ensures payment under the letter of credit if the holder and the issuing bank default. The issuing bank in international transactions typically requests this arrangement.

AN EXAMPLE OF A LETTER OF CREDIT
Citibank offers letters of credit for buyers in Latin America, Africa, Eastern Europe, Asia, and the Middle East who may have difficulty obtaining international credit on their own. Citibank’s letters of credit help exporters minimize the importer’s country risk and the issuing bank’s commercial credit risk.

Letters of credit are typically provided within two business days, guaranteeing payment by the confirming Citibank branch. This benefit is especially valuable when a client is located in a potentially unstable economic environment

FREQUENTLY ASKED QUESTIONS

WHAT IS A LETTER OF CREDIT?
Often in international trade, a letter of credit is used to signify that a payment will be made to the seller on time,  and in full, as guaranteed by a bank or financial institution. By sending a letter of credit, the bank will charge a fee, typically a percentage of the letter of credit, in addition to requiring collateral from the buyer. Among the various forms of letters of credit are a revolving letter of credit, commercial letter of credit, and confirmed letter of credit.


WHAT IS AN EXAMPLE OF A LETTER OF CREDIT?
Consider an exporter in an unstable economic climate, where credit may be more difficult to obtain. The Bank of  America would offer this buyer a letter of credit, available within two business days, in which the purchase would  be guaranteed by a Bank of America branch. Because the bank and the exporter have an existing relationship, the  bank is knowledgeable of the buyer's creditworthiness, assets, and financial status.


WHAT IS THE DIFFERENCE BETWEEN A COMMERCIAL LETTER OF CREDIT AND A REVOLVING LETTER OF CREDIT?
As one of the most common forms of letters of credit, commercial letters of credit are when the bank makes payment directly to the beneficiary, or seller. Revolving letters of credit, by contrast, can be used for multiple payments within a specific time frame. Typically, these are used for businesses that have an ongoing relationship, with the time limit of the arrangement usually spanning one year


LEASING A BANK SECURITY LIKE BG/SBLC

WHAT IS A LEASED BANK SECURITY?
A leased bank guarantee is a bank guarantee that is leased to a third party for a specific fee. The issuing bank will conduct due diligence on the creditworthiness of the customer, looking to secure the bank guarantee. Following this it will lease a guarantee to that customer for a set amount of money and over a set period (typically less than two years).

The issuing bank will send the guarantee to the borrower's main bank, and the issuing bank then becomes a backer for debts incurred by the borrower, up to the guaranteed amount.

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• A leased bank guarantee (BG) is the cash-backed bank guarantee of a third party for a fee. 

• An issuing bank will lease a guarantee to a customer it has deemed to be creditworthy for a set fee and over a certain period.

• The issuer sends the guarantee to the customer's primary bank, taking the role of backer for any debts the customer    accrues,  up to the amount that has been guaranteed.

• Fees, which typically include an initial setup fee and an annual fee, tend to be expensive relative to the guarantee amount         and   compared to other types of financing.

• Smaller corporations tend to use leased bank guarantees, particularly when they are unable to secure another type of financing.

UNDERSTANDING LEASED BANK GUARANTEES
Leased bank guarantees tend to be awfully expensive; fees can run as high as 15% of the guarantee amount every year. The fee usually consists of an initial setup fee and an annual fee, both of which will be a percentage of the dollar amount that the issuing bank "guarantees" (or covers) if the company is not able to promptly pay its debts.

Smaller enterprises typically only use this option for financial backing (particularly those who are desperate to expand operations and/or fund a specific project). These enterprises will have typically exhausted other opportunities to raise financing or obtain a letter of credit from their own bank 



LEASED BANK GUARANTEE AND DETERMINING CREDITWORTHINESS
To determine if a borrower is worthy of a leased bank guarantee, many banks will undertake a credit analysis. Credit analyses focus on the ability of the organization to meet its debt obligations, focusing on default risk.

Lenders will generally work through the five Cs to determine credit risk: the applicant's credit history, capacity to repay, their capital, the loan's conditions, and associated collateral. This form of due diligence can revolve around liquidity and solvency ratios.