A standby letter of credit (SBLC) is a guarantee of payment issued by a bank on behalf of a client that is used as “payment of last resort” should the client fail to fulfil a contractual commitment with a third party
Standby letters of credit are created as a sign of good faith in business transactions and are proof of a buyers’ credit quality and repayment abilities. The institution issuing the SBLC performs compliance and brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then sends notification to the bank of the party requesting the letter of credit (typically a seller or creditor).
Importantly, when requesting a SBLC, a business owner proves to the bank he is capable of repaying the loan. Collateral such as promissory notes, post-dated cheques and Escrow deposits will be required to protect the bank in case of default. According to the service level agreement the bank typically provides a letter to the business owner within one week of receiving documentation. The business owner must pay a SBLC fee for each year that the letter is valid. The negotiable fee is typically 1-10% of the SBLC value.