After receiving the necessary documents (application form and project presentation), our team will try to review your request as soon as possible, and leading experts will offer the best options for project funding.
One of the most reliable and convenient instruments for guaranteeing payments is a standby letter of credit (SBLC).
ESFC Investment Group offers its clients a full range of professional services related to standby letters of credit and bank guarantees, and also provide long-term bank loans.
Our team ensures that both parties can conduct international trade safely.
With can provide you with comprehensive assistance to meet your import and export business needs.
Standby letter of credit (SBLC): an overview and how it works
A standby letter of credit means an obligation of the issuing bank to the beneficiary (exporter or bank) to make payment within the specified amount in case the applicant (importer) fails to fulfill its obligations under the main contract.This requires the beneficiary to provide a certain list of documents, in particular his statement of non-fulfillment of obligations under the contract.
A standby letter of credit is an obligation of the bank, and not by the principal, to make payment upon receipt of the required documents. It is the bank that bears the payment obligation and is the guarantor of the security of the transaction. The party that acts as the principal of a standby letter of credit can be sure that in the event of a default in contractual obligations, the beneficiary will receive payment only after the documents required under the letter of credit are presented.
Standby letters of credit may be issued under the Uniform Customs and Practice for Documentary Letters of Credit (UCP 600) or International Standby Practices (ISP 98).
Advantages of a standby letter of credit for the parties
SBLC is usually used in cases where one of the parties to the contract wishes to receive the maximum guarantee of the performance of contractual obligations by the other party.The party that acts as the beneficiary of a standby letter of credit can be sure that it will receive funds from the bank when it provides all the documents required by the principal. This service includes the original payment request, a copy of the unpaid invoice along with copies of shipping documents.
Payment under the contract is carried out regardless of the financial health of the contractor. A standby letter of credit is an excellent tool for both large companies and SMEs.
A standby letter of credit is one of the forms to mitigate such risks as:
• Risk of non-receipt of payment or late payment.
• The risk of the buyer receiving the wrong product or receiving the product late.
• Some significant legal risks associated with the international transaction.
For both parties involved in foreign economic transactions, this means greater security of the transaction and its compliance with international norms and standards. Another advantage is the use of the SWIFT system as a communication channel with the counterparty bank.
It provides fast and secure communication between more than 11,000 banks and financial institutions around the world.
Table: Advantages of a standby letter of credit for the buyer and the seller
| Advantages for a buyer (applicant) | Advantages for the seller (beneficiary) |
| Receiving goods without prepayment | Shipment of goods with a 100% guarantee of payment |
| Receiving goods with deferred payment | Prompt receipt of funds under a standby letter of credit in case the applicant fails to fulfill its contractual obligations |
| Temporary use of funds of the issuing bank in case of failure to make a payment on time or other specified cases | Double guarantee of payment for the delivered goods, received from the issuing bank and from another large foreign bank |
| Fulfillment of obligations to the beneficiary guaranteed by the issuing bank or an international foreign bank | The possibility of increasing the volume of supplies, promoting goods (services) to new markets, with additional competitive advantages. |
| The buyer has the opportunity to defer payment until the relevant documents confirm the shipment of the goods of the appropriate quality to the specified place | |
| It provides for the possibility of early termination of the standby letter of credit in case of fulfillment of obligations to the beneficiary |
SBLC, documentary credit or bank guarantee: some differences in services
By its definition, a standby letter of credit resembles a bank guarantee, and this is also the case in practice.The standby letter of credit is in many ways similar to the standard documentary letter of credit (D/C) previously widely used in Europe.
The difference lies in the nature of a documentary letter of credit and a standby letter of credit is emphasized by the role played by the bank in these two transactions. In the case of a documentary letter of credit, the issuing bank actively participates in the commercial transaction.
After issuing a standby letter of credit, the bank passively waits for a possible claim from the beneficiary, because in the case of a SBLC, the transaction should be settled directly between the importer and the exporter. Only when the importer fails to fulfill its obligations contained in the contract, the exporter with the security in the form of a standby letter of credit may request payment from the issuing bank, presenting the documents required, including the statement of the exporter (beneficiary) of refusal to pay by the importer.
The term SBLC cannot include a documentary letter of credit or any instrument under which the originating bank expects payment to the beneficiary.
A standby letter of credit is also governed by other rules of the International Chamber of Commerce in Paris, which makes it different from most bank guarantees widely used around the world.
The content of a standby letter of credit is also more formalized than bank guarantees, due to the fact that it is most often sent in the form of a SWIFT message, where highlighted fields are used indicating, for example, the date of loading of the goods, the points of departure of the goods, etc.
In this respect, an SBLC is more like a documentary letter of credit.
In some cases, except for the name of the document, its content is no different from a regular bank guarantee, and sometimes in contacts with a counterparty from the United States, it is enough to replace the words “bank guarantee” with “backup letter of credit”, and there will be no problems with accepting this security for another side.
Use of standby letters of credit in foreign economic activity
Entering foreign markets is often associated with a lack of knowledge about instruments that can hedge risks, including counterparty risk, its financial health and creditworthiness.This creates situations where companies are unable to ensure the safe and fast execution of the contract.
Sometimes risks deter businesses from going further abroad because they don't know how to minimize risk in foreign trade. Meanwhile, a period of geopolitical change and uncertainty in the markets (which is what we have been seeing in Europe and Asia since 2022) can be an excellent opportunity for businesses to develop new markets and occupy attractive niches.
A standby letter of credit is a form of guarantee for commercial transactions, which is used mainly by companies establishing business relations with foreign companies.
Thanks to SBLC, exporters are guaranteed to receive payment for the goods delivered, and importers are guaranteed that suppliers fulfill the terms of the contract.
This procedure often involves a financial institution providing a bank loan for a specific transaction.
SBLC is a versatile financial mechanism for ensuring payment under a contract, which in its economic essence resembles bank guarantees. However, the latter are usually provided on the basis of national legislation, while standby letters of credit are provided on the basis of international Uniform Customs and Practices (UCP).
Most often, a standby letter of credit is used by American and Japanese banks, where traditional European form of guarantee is rarely used. In recent years, thanks to globalization, SBLC is also becoming more and more popular in EU countries. North American banks and corporations with American capital present in the European market have a very significant influence on this.
The range of application of SBLC is quite wide and includes the following situations and services:
1. When the importer's costs for opening a commodity letter of credit turn out to be unreasonably high.
2. When there is a need to secure the exporter's obligations under a letter of credit, which provides for an advance payment by the issuing bank, or to secure obligations to pay penalties and fines in favor of the importer.
3. When the payment terms of the foreign trade agreement do not provide for the letter of credit form of payments. In such a situation, it is possible to apply a standby letter of credit, which is consistent with its economic and legal nature.
4. When the buyer's working capital is sufficient for timely payment of the contract, but the supplier insists on using a more secure form of payment than a traditional transfer. In this case, the parties can agree on payments under a foreign economic contract using promissory notes issued to the seller, or on the terms of a loan on an open account.
5. When partners need to strengthen payment guarantee. A letter of credit covering one or two shipments is issued as security. If the buyer pays according to the contract, the standby letter of credit is not used. If he does not pay for a certain batch of goods, the seller can apply to the bank to make a payment or draw up promissory notes under a standby letter of credit.
One of the features of the reserve letter of credit is related to its processing.
In export agreements, the basis for the use of letters of credit are documents that confirm the exporter's proper fulfillment of obligations regarding the shipment of goods.
In order for the bank to settle under the standby letter of credit, the seller, together with copies of the shipping documents that meet the terms of the letter of credit, must submit a statement that the applicant of the letter of credit has not fulfilled his payment obligations. At the same time, banks make the payment unconditionally, since their obligation to settle under the letter of credit does not depend on the veracity of such a statement.
SBLC is intended both for small and medium-sized companies that are just taking their first steps in foreign markets, and for large businesses that have been present in international trade for a long time.
In some regions of the world, a standby letter of credit is one of the main tools for securing international business transactions, so it is worth familiarizing yourself with its advantages and using them to improve your market position and acquire new business partners.
Our team will help you master this financial mechanism with the maximum benefit for your business.
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