The procedure for acquiring a Standby Letter of Credit (SBLC) involves the applicant applying to a bank, establishing creditworthiness, and more often than not setting up money collateral and paying a fee.
Things you should be aware of Standby Letter of Credit (SBLC)
A standby letter of credit, normally referred to as a SBLC or LOC, is a written obligation of the bank issuing the letter of credit expressing that the bank will pay the beneficiary of the letter of credit in the event that the bank’s customer, the applicant for the SLC, neglects to pay the beneficiary money due him from the applicant. Essentially, the SLC is a type of reinforcement payment insurance designed to guarantee that the seller in an exchange receives the money due him from the buyer. It is payable to the beneficiary, as per the terms of the SBLC, upon demand, and the issuing bank can’t refuse to make payment due to any disagreements between the applicant and the beneficiary.
Standby Letter of Credit (SBLC) are normally considered as certifications of the applicant’s creditworthiness and capacity to make the necessary payment to satisfy his contractual obligation to the beneficiary of the SBLC. In the event that the bank issuing the SBLC ends up making payment to the beneficiary, it expects, or if nothing else hopes, to be paid back by the applicant.
Time frame for Standby Letter of Credit (SBLC)
The time frame a Standby Letter of Credit (SBLC) is in effect is for the most part about a year, considering the applicant to make standard payment to the beneficiary.
In the event that a seller requests a standby letter of credit(SBLAC), he ordinarily demands that it be an irrevocable letter of credit, meaning that the terms of the SBLC can’t be modified without the beneficiary’s consent. The applicant then requests the SLC from his bank. The issuing bank commonly reviews the creditworthiness of the applicant preceding issuing the SBLC. Everything except the most creditworthy applicants for a SLC are required to post money collateral with the issuing bank covering at any rate a part of the measure of the SBLC, and they should likewise pay a fee to the issuing bank, commonly 2-5% of the measure of the SBLC. The applicant then provides a letter of affirmation to the beneficiary from the issuing bank; this is called a bank affirmation letter.
Notwithstanding the applicant, the issuing bank and the beneficiary, a fourth gathering involved with a SBLC is the affirming or prompting bank. This is a bank, normally located near the beneficiary, that pays the beneficiary on behalf of the issuing bank if the Standby Letter of Credit (SBLC) becomes payable. This arrangement is more typical in international transactions. The beneficiary more often than not pays the affirming bank a little fee.