In today’s financial markets there is misinformation pertaining to Bank Guarantee and Standby Letter of Credit transactions, largely due to the lack of correct information available. In order to keep informed one must go out of their way to learn about the industry and how it operates.
The Bank Instrument industry is a world where real information, truthful processes and real bank instrument providers are hard to come by. Here we will try to provide some useful information so that you can educate yourself further on how this industry operates. In this section we will talk about Standby Letters of Credit.
What Is A Standby Letter Of Credit?
Letters of Credit (LC) can be classified as either documentary Letters of Credit or Stand By Letters of Credit (SBLC/SLOC). A Documentary LC allows payment to the seller. It facilitates the movement of goods in an international transaction. In trade finance, Letters of Credit is one method of payment used to reduce risk in global transactions between a Buyer and Seller of goods. They are mainly used for commodity and industrial use as performance bonds.
A Standby Letter of Credit 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. You can either lease or purchase a Standby Letter of Credit. In other words; an SBLC is a document issued by the bank guaranteeing payment on behalf of their client. The bank confirms the collateral is held within their clients account, the client buys an instrument and it is then freshly cut backed by Providers capital.
Finance A Business Using An SBLC
As well as trade finance, Standby Letters Of Credit can be used to finance a business; particularly those looking to grow or expand. Having a bank instrument monetized is the best and quickest way for a business to get some much needed cash. Bank instruments can be monetised and used to enter into trade platforms. Please note that strict terms and conditions apply.
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 the 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.
Using the above example, banks operate exactly 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..)
Genuine SBLC Providers
As discussed at the beginning, SBLC Providers can be hard to come by. 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. The high net worth clients are usually hedge funds, private equity, pension funds, etc.. It is very difficult not only to get in touch with bank instrument Providers, they are very strict too, they don’t mess around.
Genuine Providers perform many checks and balances which means that any authorised mandate agents connected to Providers are too follow strict procedures. This is good new on our part as we know we carry 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 for 10% 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 Does SBLC Financing Work?
When a company completes the forms to lease an SBLC, what they are essentially doing is borrowing collateral (what this is actually 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 instead prefer to lease an SBLC.
When leasing a bank instrument, the DOA is a legal agreement signed by bpth Parties. It states that you will lease the SBLC for one year and one day at $100MUSD 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.
Two things to take note: 1) There is no standard leasing process, leasing programs differ and each determined by the Provider. 2) The Provider instructs the bank what to do therefore if you choose to go through a bank for sblc service, you may be faced with lots of paperwork as they have policies and guidelines to adhere to.
Apply For A Bank Instrument
You can apply to have an SBLC either through a bank or use our services. We can give you a number of options to help fund your project. As our team has streamlined the process the paper work saving time and headaches! The image below is an example of the process of acquiring the bank instruments for a Standby Letter of Credit.
Lease An SBLC
You can apply to obtain a leased Standby Letter of Credit in one of two ways. One way is to apply for an SBLC with your bank or; use authorized agents such as ourselves 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 Lettr on behalf of of their client. It’ll say something like “ Our client on behalf of [bank] is RWA”…. the receiving bank also sends a 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.
Monetizing An SBLC
After leasing an SBLC, you may want t0 monetise it. All that happens when you monetize an SBLC is the instrument is converted into legal tender. This can take up to 15 days to process and verify. Your bank should be able to do this for you. It wont be monetised 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 An SBLC
Purchasing an SBLC, it is similar to the process of leasing an SBLC. 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. Purchasing an SBLC is advantageous in that you can then choose to lease the instrument out if you so choose to do so.
SBLC 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 or not the funder has an appetite
- Other projects in the pipeline thus having to wait a few months.
With SBLC financing this 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 that it is our requirement that we ask you to provide Proof of Funds and 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.
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 (Link to another website with typical SWIFT charges). Sending a SWIFT message isn’t cheap, these are banks charges! We suggest that if you need an SBLC, prepare at lest 15% of your asking amount to the cost towards 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 sates that the Buyer has the funds. This needs to be arranged before the DOA is signed.
Need A Large Bank Instrument?
If you need a SBLC up to $10B USD we can arrange this for you. If you need an SBLC for over $10B, it can be arranged on a case by case basis. Please fill out the inquiry form below in order for us to discuss your options.