Standby Letter Of Credit and How Does It Work

When you carry a business, you certainly know the risks and things can go wrong anytime. This is the reason why you always should have some back up plans and this is the reason a lot of people invest in ban instruments like the SBLC.

So what is SBLC?

SBLC is the guarantee that your bank provides you in writing, here they sate that if anything goes wrong with your transaction with the seller, then the bank will pay on behalf of you. Now, this is the easiest way we can make you understand the concept of SBLC or the Standby letter of credit. However, the most important thing you need to remember is that, SBLC, unlike the letter of credit, is not meant to be used. It is more like a damage control and a backup plan that can be used only if there is a “huge” problem; for instance, you’re filing for bankruptcy.

However, acquiring the SBLC actually has a lot of benefit for your trades both nationally and internationally. The security you get from the bank helps you gain the right kind of trusts from your traders and that is one of the biggest advantages of the SBLC financing.

There are two types of Standby letter of credits –

1.    The financial Standby letter of credit – When it comes to the financial SBLC, it is usually in terms of paying the money back to the seller. For instance, if you have bought something from a foreign seller or even from a local seller, and you promised them to pay the amount in 60 days but you never did, then the seller will collect the money from your bank(if you have SBLC). However, when you get an SBLC from your bank, it is just because you might have hold a good financial history in the past and your bank trusts you. Therefore, the bank will assume that you’ll pay them back.

2.    The performance Standby Letter of Credit – In case of performance SBLC, the example is pretty simple. For example, if you as a contractor has promised to complete a construction within a certain period of time and you have failed to do so, your customer can go ahead and collect the payment be it the penalty, advanced payment or any other sort of payment from your bank in the name of the performance SBLC.

There are a lot of benefits of having an SBLC. All you need to do is contact the bank.