Financial Credibility of SBLC Standby Letter of Credit

1
What is SBLC 'Standby Letter of Credit'?
2

• A SBLC standby letter of credit, also known as a
  standby or LOC, is a lender's guarantee of
  payment to an interested third-party in the event
  the client defaults on an agreement.
• Standby letters of credit are formal documents
  that specify the duties and obligations of each
  party and serve as an act of good faith.
• The bank issuing the SLOC performs general
  underwriting duties to ensure the financial
  credibility of the party seeking the letter of
  credit.

3
(No Transcript)
4

• Then it sends a notification to the bank of the
  party requesting the letter of credit (typically
  a seller or creditor).
• A SBLC standby letter of credit shows a companys
  credit quality and ability to repay debts.
• An SLOC helps fulfill business obligations if a
  business ceases operations, cannot pay its
  vendors, or becomes insolvent. 
• They are also beneficial for international trade,
  which involves significant financial risks due to
  conflicting national laws

5

• Small businesses often face difficulty when
  securing financing. Therefore, standby letters of
  credit are beneficial as they encourage investors
  to lend money.
• In case of default, the bank securing the SLOC
  assures investors that both principal and
  interest will be paid.
• A client, typically a business owner, requesting
  a standby letter of credit must prove to the bank
  that he/she is capable of repaying the loan.

6
(No Transcript)
7

• Collateral may be required to protect the bank in
  the event of default. The bank typically provides
  a decision in writing within one week of
  receiving final documentation to complete the
  processing of the client's application.
• The client must pay a SLOC fee for each year that
  the letter is valid.
• The fee is typically 1-10 of the SLOC value.
  Provided the arrangement's stipulations are met,
  the client is permitted to cancel the SLOC
  without incurring additional charges.

8
(No Transcript)
9
Example of SBLC standby letter of credit

• A financial SLOC, the most common type, is
  typically used in international trade or other
  high-value purchase contracts where litigation or
  other non-payment actions may not be feasible.
• A financial SLOC guarantees payment to the
  beneficiary if contract requirements are
  unfulfilled.
• For example, an exporter sells goods to a foreign
  buyer who guarantees payment in 30 days.

10

• When no payment is received by the deadline, the
  exporter presents the SLOC to the buyer's bank to
  receive payment.
• A performance SLOC ensures that time, cost,
  amount, quality of work, and other criteria are
  fulfilled in a manner acceptable to the client.
• The bank pays the beneficiary if any contractual
  obligations are unmet.

11
(No Transcript)
12

• For example, a contractor guarantees a
  construction project will be finished in 90 days.
• If work remains incomplete after the 90-day
  period, the client can present the SLOC to the
  contractors bank and receive payment.

13
(No Transcript)