Standby Letter of Credit 

Globalization supports most industries, However in Financial markets there is a lack of understanding about (BG/SBLC) pertaining to Bank Guarantee and Stand by Letter of Credit. (Cash back) The rule of the game is simple to manage your funds / credit facility with the help of an Investor / Providers.   The truth is Lender / Provider work for some Basic Principle, terms and conditions, may differ between providers.  I Cash Fintech offers detailed information about the basic structure of the product and teaches about the industry and how it operates. 

The Bank Instrument industry is a world-wide where real information, truthful processes and real bank instrument providers are hard to come by. Here we will try to provide some useful information for you to learn and how this industry operates between Receiver and provider.  In this part we can learn about SBLC – Stand by Letter of Credit. 
 

What Is A StandBy Letter Of Credit? (SBLC) 

A SBLC is a document issued by the bank guaranteeing payment on behalf of their client. SBLC is an agreement, not intended to be drawn upon but is a safeguard in the event of non-payment by either party mentioned in the contract.   

• Bank confirms the collateral is held within their client's account 

• Client buys an instrument, and it is then freshly cut backed by Providers capital.  

• Depending on the wording agreed in the DOA, it is possible to   Monetize an SBLC (or) Submit the instruments as collateral to your bank and get working capital facility (or) Issue the SBLC to your Supplier (Mostly used for Importers) as Collateral to supply the material and make the payment through MT103 

• Client (receiver) can offer this instrument as Collateral to your existing bank and get Credit facility / working capital (Indicative) of 75% to 90% depends on your banking relationship, credit history, etc., 

 

SBLC for Importers with regular business contract: 

• SBLC offered to supplier with a Face Value of 10 MN $(Cash Back / Revolving) 

• The SBLC lease period of 365+ 1 day  

• Based on SBLC – supplier can deliver the material worth of 10 MN $ at the destination port – on monthly basis  

• Buyer takes the material and make the payment to supplier on each shipment through MT103 10 Mn $ on monthly basis 

• Total Transaction of 120 Mn $ completed with 1% (assume the lease cost of 12% annually) 

 

Finance A Business Using Standby Letters of Credit can be used to finance a business; particularly those looking to grow or expand. Having an SBLC Monetized is the best and quickest way for a business to get some much-needed cash. Bank instruments can be monetised and used to trade platforms. SBLC’s could be one of the best alternative ways to finance a business. The reason being is that you are not dependent on a lender per se. It is likely that the funds will arrive in tranches, and this could be a perfect way to manage your capital. 
 

What Parts Do Banks Play In SBLC Transactions? Technically speaking, “Banks DON’T issue Standby Letters of Credit” Instead, the bank is the deliverer not the initiator of the transaction, they CONFIRM their client has sufficient funds. For example, let’s pretend you use a courier to deliver a parcel to a customer. You are the Provider of the parcel, and the courier is the delivery agent who delivers your parcel to the Receiver. The courier isn’t the Provider of the parcel, they are just the delivery agent whom the Provider uses to send the parcel from the Providers location to the Receivers location. 
 

The same example apply here Bank operate the same way when handling Standby Letters of Credit. The bank acts as the courier and they receive a financial instruction from a Provider to deliver one of the Providers assets (Bank Guarantee – BG or SBLC) to the Receiver’s bank. In other words, the banks are in place of the courier, being that they are the Sender and Receiver of Swift Messages most commonly known as MT messages. (Whether it be MT760, MT799.etc. 

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The banks don’t advertise SBLC’s as their own bank products, simply because they are not allowed to. Standby Letters of Credit are provided by high-net-worth clients with large cash holdings in an account at the Bank. High net worth clients are usually hedge funds, private equity, pension funds and large corporations etc. It is very difficult not only to get in touch with bank instrument Providers, but They are also very strict too, they don’t mess around  

 

Professional providers (Genuine) perform many checks and balances which means that any authorized mandate agents connected to Providers are too strict to follow procedures. This is good news on our part as we know we want to do clean business, but it means that any business we introduce needs to be able to follow certain procedures. Because of the strict ruling, Prestige will let you know what is required but in general we will ask for POF and BCL to say you can pay 12% of the LTV/face value of the bank instrument. We want to know that every business that passes us has the capability to afford the lease fee. 
 

How Do SBLC’s Work? 

 
When a company completes the forms to lease an SBLC, what they are essentially doing is borrowing collateral (what this is called is a temporary “CTA” Collateral Transfer Agreement). Let’s say that you are an oil refinery company looking to buy oil and are dealing with say ABC Oil. You have an agreement with ABC Oil saying that you want to buy $100M USD worth of oil (on your books you have $10B USD) . You may choose not to use your own bank account and apply through your own bank but instead, prefer to lease a Standby Letter of Credit from a different Provider. 

 
There are several ways SBLC’s can be used, and it is all in the wording of the MT760. Providers can issue Standby Letters of Credit for the purposes of: 
• Trade and Commerce – (for purchasing of goods). 
• They can also be used to back credit lines issued by banks 
• And/or project funding 

As well, there are Providers who can issue cash backed SBLC’s which are monetizable. However we will need to know who the monetizer is to assign the SBLC in Favour of the Monetizer. 

 

When leasing a bank instrument, the DOA is a legal agreement signed by both Parties. It states that the titled owner will lease the SBLC for one year and one day at $100M USD giving it back with no liens or encumbrance. The legal documents is called a Deed of Agreement (DOA). Both banks will also send a Ready Willing and Able (RWA) message to each other. The Providers bank confirms it’s ready to issue the SBLC and Receivers bank confirms their client has the funds. 

After the DOA and RWA are signed and SWIFT fees are paid, the banks of both parties will message each other until the instrument is transmitted to the Receiver. In some agreements should one fail to meet the timeline, there will be a penalty and risk of no further business. 
 
The two Important steps: 

1.  There is no standard leasing process, leasing programs different, and each determined by the Provider. 

1. The provider instructs the bank what to do, therefore if you choose to go through a bank for a SBLC service, you may be faced with lots of paperwork as they have policies and guidelines to adhere to. 
    

Lease An SBLC- You can apply to lease an SBLC in one of two ways.  One way is to apply for a Stand by Letter of Credit with your bank or use authorized agents such as I-Cash Fintech and fill in a DOA (deed of Agreement). Some terms and timelines may be negotiated (there may be an element of flexibility through some Providers). We stress that buyers should clearly understand the documents before signing them. Double-check your details, be clear and correct as it can be a very costly mistake. 

 
The Providers bank will send a Ready, Willing and Able Letter on behalf of their client. It’ll say something like “Our client on behalf of [bank] is RWA” …. The receiving bank also sends an RWA on behalf of the Receiver. The SWIFT fees are then called upon and the SWIFT messages are exchanged bank to bank until SBLC is issued. A hard copy of the SBLC will be sent to the Beneficiary. 

 

SBLC Funding Process- The image below is an example of the process of acquiring the bank instruments for a Standby Letter of Credit. When the banks have completed their messaging, you may receive a hard copy of the SBLC/MT760. Just bear in mind whether it's for commerce purposes or if you can have the SBLC monetized. This is the part many people often get confused. 
 
What is Fresh Cut SBLC ? 

It means that it has been freshly issued, “seasoned instrument” means that it was issued in the past and is in the secondary market. People buy fresh cut bank instruments as the bank instrument comes from a direct credible source thus knowing exactly the person/organization who cut the instrument for lease. Usually bank instruments such as SBLC’s are time limited and should be paid back in full to the Provider within the time specified. 
 

Monetizing An SBLC: After leasing an SBLC, you may want to monetize it. All that happens when you monetize an SBLC is the instrument is converted into legal tender. This can take between 15 to 20 working days to process and verify. Your bank should be able to do this for you and between us.  It won't be monetized for the full amount as it can vary on a number of factors such as; bank rating, country of issuance, LTV … etc. 
 

The instruments must be in your name and there is a time limit on a leased SBLC’s. These bank instruments can only be leased for one year and one day. Bank instruments are checked for forgery and there are strict guidelines to adhere to.  Heavy due diligence will be undertaken. Banks that issue fresh cut bank instruments must be UCP-600 compliant and be a top banking institution. 
 

Purchasing A Standby Letter Of Credit: Purchasing an SBLC, it is similar to the process of leasing a StandBy Letter Of Credit. The main difference is that you own the instrument in your company /name. For example: The Provider is the asset owner, asset holder and asset controller. If you choose to purchase the SBLC, the title of goods will be transferred to you.  

SBLC Project Financing V’s Conventional Funding- Conventional funding can take a long period of time from submission to receiving funds for a project. The reasons can include; 
• A lengthy due diligence procedure and/or 
• Whether the funder has an appetite 
• Other projects in the pipeline thus having to wait a few months. 
 

Financing projects with an SBLC can be a cheaper and faster route as the procedure takes a few weeks and is less onerous. Leasing a bank instrument can be also a cheaper as some investment banks charge thousand of dollars to fund a project. 

 
Please note; it is our requirement that we ask you to provide Proof of Funds and/or a bank comfort letter. This is to demonstrate to the Provider that the companies we represent are in good faith and in trust to pay lease fees. 

 
Swift Fees When people apply for an Standby Letter of Credit most do not understand how the mechanism behind the transaction works. There are certain buyers who think that there are no fees involved when issuing a bank instrument and presume the SWIFT messaging service is free. This is not the case. The banks of both parties communicate as per the DOA agreement using SWIFT messages, recognizable to us as MT messages. 
 

Please check on the search engines for SWIFT Fees. Sending a SWIFT message isn’t cheap, these are banks charges!  

We suggest that if you need an SBLC, prepare at least 12% of the amount asking to go towards the cost of an SBLC. 

 
One way in which the buyer might not have to pay SWIFT Fees is by having the bank issue a Bank Comfort Letter (BCL). This letter just states that the Buyer has the funds. This needs to be arranged before the DOA is signed. 

The Consultant fee: 

We charge a consulting fee of $ 250 to understand the importance of each step depending on receiver, provider, agent time and energy to get the deal professionally.  

The disclosure of the consultant fee is part of DOA (deed of agreement) executed between receiver and provider.  Example: if 10+2 agreed on the DOA, out of 1% goes to provider company / fund house and another 1% goes to consultant like us. 

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