Suppose a buyer in the USA secures a one-year cross-country fuel supply contract with a seller in Germany. After securing the relationship and offering the seller a guarantee, the SBLC is issued.
Also referred to as the standby letter of credit, it’s a financial instrument issued by the bank. It’s a safety net for paying the seller for the services or physical goods. It’s mostly required when certain unforeseen scenarios prevent a buyer from making the payment to the seller.
Getting SBLC financing is the most effective way to create a guarantee of funds even when the individual who promises to pay doesn’t have enough funds.
The Purpose of SBLC Monetization – Why Is It Important?
SBLC instruments can help both sellers and buyers. Sellers get the guarantee to be paid, and this process also reduces risks. Suppose the production order is reduced or canceled by the buyer. In such cases, SBLC ensures a buyer gets the services and goods outlined in the official document.
Monetizing SBLC means acquiring the right to use your SBLC as collateral to borrow money. The bank provides this financial instrument to guarantee payment to the beneficiary if the party obtaining the instrument fails to fulfill the obligation.
The buyer’s bank needs to perform the underwriting duty to verify the buyer’s credit. As soon as the bank gets satisfactory reports from the buyer , it sends a notification to the seller’s bank. That assures a commitment to paying the amount to the seller even when the buyer defaults.
The monetization of SBLC is a process of improving liquidity. Besides, it also frees up capital that might have been tied up in the instrument you don’t use soon. So, with this process, businesses can pursue incredible growth opportunities and take advantage of the market conditions.
The following are the benefits of monetizing SBLC:
An Opportunity for Funding
The monetization of SBLC offers businesses access to added liquidity or funding. These can be used to finance any project or expand in case of insufficient collateral.
A Speedy Process
SBLC monetization helps improve the business’s cash flow. It offers a source of funding used to cover costs or invest in further growth opportunities.
Offers Immense Flexibility
Leased SBLCÂ monetization offers businesses the required flexibility to expand their financing options. With SBLC used as collateral, the business gets an upper hand in negotiating favorable terms. For instance, it helps acquire a lower rate of interest and a longer repayment period.
Reduces Risks
As already said above, monetizing SBLCÂ helps manage risks. Suppose your company obtains the SBLCÂ to secure your one-year contract with a customer. In such cases, monetizing SBLCÂ offers additional funds to your business and helps you fulfill the obligations mentioned in your contract.
Thus, besides lowering financial risks, SBLC monetization also reduces exposure to credit risk. It becomes a practical step for businesses that operate in industries prone to financial risks or uncertain instances.
Steps Involved in Monetizing SBLC – How Does It Work?
Monetizing the SBLC involves the borrower finding a lender who’s willing to accept the leased SBLC as the loan’s collateral. On the other hand, the lender needs additional details about SBLC from the borrowers.
The bank’s creditworthiness and other details are imperative to consider. Monetizing the SBLC is a useful method for the borrower to get funding. However, there are certain risks involved in the process. Suppose the borrower fails to fulfill the obligation under the contract. In such a case, the lender might use SBLC to recover the loan. Here’s how it works:
Obtaining the SBLC
The steps associated with the monetization of SBLC aren’t so simple. The client should obtain SBLC from the bank. So, one should provide important documents like the following:
- Financial history
- Creditworthiness
- Obligation’s details
Finding a Reputable Lender
The next step is to find a reliable lender. One needs to find one of the reputable bank instruments providers to lend money against SBLC. The lender might need the client to give specific information.
Signing the Agreement
As soon as the monetization terms are agreed upon, the lender and client need to sign the contract. This contract should outline each party’s loan terms, obligations, and rights.
Providing the SBLC
Next comes the step  of providing SBLC to the lender as the collateral. The lender might need the client to offer an original SBLC copy or might accept the certified copy.
Repayment
Lastly, the client needs to make regular payments to the lender about the loan agreement.
One quick note: When compared to an owned or purchased SBLC, an SBLC lease cannot be leased out further. Private service providers monetize the leased SBLC.
Who Are the Parties Involved in SBLC Transactions?
SBLC or standby letters of credit transactions include various entities. Everyone fulfills specific rules that ensure the financial commitment remains guaranteed. All parties involved in SBLC transactions facilitate trust among one another in trading.
The issuing bank acts on the applicant’s behalf. It guarantees the beneficiary will get payments even when the party fails to fulfill the terms. On the contrary, the beneficiary or seller is entitled to payments under the terms.
So, they need to present the right documents. Next comes the applicant – it’s generally the buyer in the transaction. The applicant is responsible for SBLC requests from the bank. They must offer collateral to secure insurance. Or they can provide the requirements of banks to agree on whether or not the SBLC should be utilized.
Located in the beneficiary’s country, the advising bank must inform the SBLC beneficiary and verify the credit’s authenticity. On the other hand, the confirming bank adds the guarantee to ensure payment even when the issuing bank defaults. The bank may check the risk factors before charging the fee.
So, these are the prime aspects you should understand about standby letters of credit. Thus, by leveraging SBLC’s value, holders can get financial resources that can be used for various purposes while improving liquidity and reducing credit risks.
