An SBLC or Standby Letter of Credit is a legal document that acts as a safety net of complicated service or physical goods. This document specified that the Bank guarantees the payment of an amount to a seller-provided a buyer defaults on the agreement. It is used in domestic and international transactions where the purchaser and seller do not know each other. Having this document eliminates the risks with the transactions to a great extent. If you need any help, a specialist can assist in this regard.
Different Types of Standby Letter Of Credit
Two different types of Standby Letters of Credits are explained here.
- Performance SBLC:
It specifies the completion of a specific project within the stipulated time. If the client cannot accomplish the work as specified in the contract, the financial institution will reimburse the stipulated amount. This type of SBLC is mostly found in completing the project within the specified timeline, like construction works, etc.
- Financial SBLC:
A Financial Standby Letter of Credit is a document that guarantees payment for services and goods as specified in the agreement. It would be best to understand with an example. Suppose a crude oil firm is shipping oil to an internal buyer in the condition that they will pay the expected amount within a month. In case the payment is not cleared, the company will take the money from the buyer’s Bank. As it is a credit, the financial institution will collect both interest and the principal amount from the purchaser.
The Working of SBLC
The process of getting a Standby Letter of Credit is more or less similar to a loan application. It begins with the buyer applying for an SBLC at a financial institution. The officials will look after all the necessary aspects, and depending on the person’s credit history, they will decide whether to sanction the funds.
The collateral depends on the business’s strength, the risk involved, and the fund started by the SBLC. Purchasers also have to provide the details of the shipping materials, seller, time until the SBLC is valid, and the beneficiary bank details. After that, the document will be verified, and the Bank will offer an SBLC. The Bank charges a fee of 1 to 10%. For more details, you can speak to an experienced specialist.
Final Thoughts
Depending on the type of SBLC, the specialist will explain its terms and conditions.
