Five Common Questions About SBLC Letter of Credit

Wouldn’t it be great to have a backup payment plan? Well, that’s exactly what an SBLC is. SBLC means a Standby Letter of Credit. It is one of the most important legal documents for trade (especially international trade). To avoid embarrassment or a lawsuit, this document is used as a last resort when one can’t complete payment. By using the SBLC letter of credit, you’re handing over the responsibility of the payment to the bank. The bank guarantees you (and your beneficiary) that, should you fail to pay on time or cannot complete the transaction for some other reason, they will transfer the money to your beneficiary’s account. It serves as a safety net for both parties.

How Exactly Does It Work?

Let’s say you make a deal with a foreign company. They’re supposed to help you build a skyscraper in 6 months. To make sure you don’t get scammed or too disappointed, you ask the company to obtain an SBLC and send it to you. After reviewing the document and making sure it is legit, you keep it somewhere safe. Now, if that construction company fails to complete the skyscraper on time or maybe backs out of the deal, you can take that letter to the company’s bank and get your money back. This way, you can quickly use that money to hire another company or just keep it.

How Do You Apply for One?

The first thing to do is to go to a bank that you trust. The application process varies with the bank; however, the main part of the process is you proving that the amount that you want the bank to guarantee your beneficiary can be repaid. You’ll get the necessary forms and also discuss the amount of collateral required.

How Is It Funded?

You fund the SBLC. Because it is an insurance-based scheme, you would be required to provide some amount of money as collateral. Some other fees might have to be paid to. This is just to ensure that the bank gets their money back after paying your beneficiary (if it comes to that).

What Is the Difference Between an LC and SBLC?

LC and SBLC are quite similar. What makes the SBLC stand out is that it acts as a plan Z. It’s only supposed to be used in the worst-case scenario. You’re actually supposed to avoid using it, unlike the LC. The SBLC can also be used for domestic trade, whereas, the LC is mostly used in international trade.

What Are the Types Of SBLC?

There are two main types. The financial SBLC and performance SBLC. As the name implies, a financial SBLC guarantees payment for the goods and services bought. A performance SBLC, on the other hand, guarantees results. If a client fails to complete a project, their bank will pay you.

Source a reliable company to offer you an SBLC letter of credit.