SBLC/BG PROVIDERS - WHO THEY ARE (2024)

FAQs

SBLC/BG PROVIDERS - WHO THEY ARE? ›

SBLC/BG Provider would often be a collateral management firm, a hedge fund, or private equity company. SBLC/BG Provider instructs its issuing bank to secure and encumber cash in his own account and authorizes the bank to "cut" (an industry terms meaning to create a financial instrument such as SBLC/BG ).

A Provider for SBLC/BG would often be a collateral management firm, a hedge fund, a Finacial Holding Company (FHC), a non-bank commercial company, or a private equity company.

These Bank Instruments (BG/SBLC) are issued through top AAA rated banks such as Citibank New York, Chase Bank, Welsfargo Bank, Bank of America, HSBC Hong Kong or HSBC London, Barclays bank London, Standard Chartered Bank London, Dubai or Hong Kong, UBS or Credit Suisse in Switzerland, Deusche Bank AG Germany etc.

A Standby Letter of Credit (SBLC / SLOC) is a guarantee that is made by a bank on behalf of a client, which ensures payment will be made even if their client cannot fulfill the payment. It is a payment of last resort from the bank, and ideally, is never meant to be used.

Genuine bank guarantee Provider is a bank or financial institution that provides bank guarantees and other bank financial instruments to its customers for specific purposes.

Summary. A standby letter of credit (SBLC) refers to a legal instrument issued by a bank on behalf of its client, providing a guarantee of its commitment to pay the seller if its client (the buyer) defaults on the agreement.

The bank offers a standby letter of credit on behalf of the importer to guarantee payment to the exporter, in case the importer defaults on the agreement. SBLC ensures hassle-free trade between international companies that have different trade laws and regulations.

In an SBLC, payment is made only when the applicant fails to fulfil their obligations under the underlying contract. In a BG, payment may be made even if the applicant has not yet failed to fulfill their obligations under the contract.

The primary cost associated with an SBLC is the fee charged by the bank for issuing it. This fee typically ranges from 1% to 10% per year of the SBLC's face value, depending on the bank's assessment of risk. The riskier the client's business proposition or the lower their creditworthiness, the higher the fee.

More often than not, the bank will issue the Standby Letter of Credit (SBLC) within 48 hours of release. Once issued, a copy of the SBLC will be emailed to you as it is transmitted by a MT760 SWIFT message to the beneficiary, including the reference number of the SBLC.

What are the disadvantages of SBLc? ›

Although an SBLC can provide a high level of security and confidence for the beneficiary, it also carries some risks and limitations. One of the main risks is that the beneficiary might not be able to access the SBLC payment if the issuing bank fails or becomes insolvent.

The buyer will request their bank to open a SBLC in favour of the seller. The seller will then ship the goods to the buyer. If the buyer pays the seller, the SBLC is cancelled and returned to the issuing bank. If the buyer fails to pay, the seller will claim the sum owed against the Standby Letter of Credit.

There are two main types of standby letters of credit: A financial SLOC guarantees payment for goods or services as specified by an agreement. An oil refining company, for example, might arrange for such a letter to reassure a seller of crude oil that it can pay for a huge delivery of crude oil.

On the flip side, there are some disadvantages such as: Sometimes, the banks are so rigid in assessing the financial position of the business. This makes the process complicated and time-consuming. With the strict assessment of banks, it is very difficult to obtain a bank guarantee by loss-making entities.

Similarly, SBLC Discounting allows the applicant to receive immediate cash by selling the SBLC at a discount to a third party. The third party takes on the risk of the applicant defaulting on their obligation, while the applicant receives cash that they can use for their business or personal needs.

All SBLC/BG are Asset/Cash backed. A newly created SBLC/BG is called "Fresh Cut" whereas an already existing SBLC/BG is called "Seasoned"

The primary cost associated with an SBLC is the fee charged by the bank for issuing it. This fee typically ranges from 1% to 10% per year of the SBLC's face value, depending on the bank's assessment of risk. The riskier the client's business proposition or the lower their creditworthiness, the higher the fee.

The buyer will request their bank to open a SBLC in favour of the seller. The seller will then ship the goods to the buyer. If the buyer pays the seller, the SBLC is cancelled and returned to the issuing bank. If the buyer fails to pay, the seller will claim the sum owed against the Standby Letter of Credit.

An SBLC is a financial instrument that is issued by a bank and guarantees payment to a beneficiary if the party that obtained the SBLC fails to fulfill a specific obligation. To monetize an SBLC, a borrower would typically need to find a lender who is willing to accept the SBLC as collateral for a loan.

There are two main types of standby letters of credit: A financial SLOC guarantees payment for goods or services as specified by an agreement. An oil refining company, for example, might arrange for such a letter to reassure a seller of crude oil that it can pay for a huge delivery of crude oil.