SBLC - A finance tool for the Elites!
What a standby letter of credit is, how it is cash-backed and used for credit lines, and why banks issue SBLCs mainly to large, established companies.
The SBLC is often described as a finance tool for the elite. Stefan Neuss, founder of WERA Capital Partners, explains what lies behind the term, how it works and who can actually obtain one.
What is an SBLC?
SBLC stands for standby letter of credit. It is an internationally recognised, standardised instrument issued by one bank to another. A common set of rules for issuing SBLCs is ISP 98.
In most cases an SBLC is fully backed by cash. Anyone who wants an SBLC of 100 million euros must block 100 million euros in a separate account at the issuing bank. This money must remain untouched for the whole term, because it is the collateral. Without full cash backing, Neuss says, it is not a real SBLC. A typical term is one year plus one day.
How it is used
The receiving bank holds the SBLC on behalf of its client, usually under a contract with that client. The most common use is a credit line. With an SBLC of 100 million euros as security, the bank might give its client a credit line of, for example, 50 million euros.
Who qualifies
This is why the SBLC is seen as a tool for large companies. Banks only issue or accept SBLCs for well-established businesses with a long track record. As a rough guide, Neuss says, an SBLC of 100 million requires annual revenue of around 400 to 500 million, solid profit margins and a stable relationship with the bank.
Options for smaller companies
Owners of high six, seven and eight-figure businesses should not be discouraged, he adds. Depending on the situation, there may still be ways to use an SBLC to grow. WERA Capital Partners reviews this in a 1h private consultation over zoom.