SBLC - Standby Letter of Credit
What an SBLC, a Standby Letter of Credit, is, who uses it and what for, the common myths, and the five steps to get one.
An SBLC, or Standby Letter of Credit, is used by 7/8/9-figure business owners, entrepreneurs and investors worldwide. In this video Stefan Neuss of WERA Capital Partners explains what it is, who uses it, what it is for and how to get one.
What is an SBLC?
An SBLC is a bank-issued guarantee in the form of a letter of credit. It is a bank instrument handled between banks. It is always issued by a bank on behalf of its client and is a legally binding commitment to pay a specific amount to a beneficiary if the applicant fails to meet their obligations. According to Neuss, the normal value is between 5 and 300 million euro or US dollar. Larger needs can be split, for example into two times 250 million.
Myths about SBLCs
- An SBLC cannot be purchased, leased or rented.
- It is always issued directly to the company that needs to use it.
- It is not a regular payment instrument. It is a financial safety net, a guarantee for default situations.
- Nowadays it is always 100% backed by real money, meaning cash in the bank. Otherwise it does not go through.
How an SBLC is issued
An SBLC goes from the issuing bank to the company that needs it. When a European bank issues it, it goes through Euroclear, which Neuss describes as more or less the KYC regulator, and then to the client's receiving bank. The issuing bank has to prove to Euroclear that the SBLC is 100% backed by real cash. Otherwise, he says, it is fake.
What is an SBLC used for?
- Securing international trade transactions, for example for commodity traders
- Project financing, for example for a property developer
- Protecting an investment while financing is arranged
- Payment or performance guarantees in a trade
- Securing a loan or credit line
- Construction and infrastructure projects
- Guarantees for energy commodities and raw materials trading
A buyer secures payment obligations to a seller, a project developer reassures investors that the money is there, and a bank may require an SBLC as collateral. In practice, Neuss notes, most SBLCs are never drawn, because their presence alone provides enough security.
Summary and process
An SBLC is an internationally recognised bank instrument that guarantees payment to a beneficiary if the applicant fails to fulfil contractual obligations, providing maximum security without immediate payment. Neuss stresses that you need to know exactly what you are looking for and how an SBLC works. The process at WERA Capital Partners has five steps:
- Zoom call
- Pre-check
- Finalisation of the contract
- Final draft
- Delivery and payment
To find out what you need, book a 1h private consultation over zoom.