Standby Letter of Credit ( SBLC )

Standby Letter of Credit ( SBLC ) is a financial instrument used in international trade transactions to provide an added layer of security for businesses engaged in such

What is SBLC ?

SBLC serves as a backup plan in case the buyer cannot fulfill their financial obligations

SBLC Operation system ?

An SBLC functions as follows .

The buyer and seller agree to the terms of the transaction , including the price , delivery date , and payment method .

The buyer applies to their bank for an SBLC in favor of the seller The buyer’s bank issues the SBLC to the seller’s bank .

The seller ships the goods and provides the required documents ( such as a bill of lading ) to the buyer’s bank

If the buyer fails to make the payment or meet their contractual obligations , the seller can present the SBLC to the buyer’s bank and claim payment .

The buyer’s bank will then release the funds to the seller , ensuring that the transaction is completed as agreed upon .

Benefits SBLC for businesses profit

Risk Minimisation

One of the primary benefits of using SBLC is that it mitigates the risk of non – payment or default by the buyer . This provides a level of security for the seller , ensuring that they receive payment for their goods or services even if the buyer is unable to fulfill their financial obligations .

Access to Financing

SBLC can help businesses access financing by providing a level of security for banks and lenders . Banks are more likely to lend to businesses that have an SBLC in place , as it reduces their risk of non – payment .

Interest Protecting

SBLC protects the interests of both parties involved in the transaction . The buyer is assured that the goods or services they are purchasing will be delivered as agreed

upon , while the seller is assured that they will receive payment for their goods or services.

Acquiring a Standby Letter of Credit ( SBLC ) is a process that requires businesses to follow specific protocols and meet certain requirements . In this blog , we will discuss the general protocols and requirements that businesses need to follow in order to acquire an SBLC . General Protocols for Acquiring SBLC .

UPAS LC

UPAS LC means usance payment at sight LC . It is very much needed for importer or Bayer for immediate payment for the exporter beneficiary for his seals goods or products . when importer unubale to pay purchase amount to exporter / slayer / beneficiary for his bank if the importer has arrangement of upasle the exporter will get payment ad sight . In that case importer will charged interest , acceptance commission and other charges as per terms of UPAS LC for using this letter of credit .

Conditions for using UPAS LC :

1. Customer must be satisfy will all conditions of existing LC .

2. Present usance draft other part for acceptance or any amendanend .

3. Usance draft will be paid by discount on at that sight basis .

• Benefit of Exporter :

1. Exporter will get payment immediately at sight from the discounting bank
2. Reduce day sales outstanding ( DSO ) with received payment sight .
3. Strengthens relationship with buyers and sellers for extended payment terms and ability of lower cost finance .

• Benefit of Imputer :

1. Interest rate compare idly lower than other finance .
2. Optimizing working capital .
3. Payment differed up to 360 days .
4. Foreign currency bought reasonable price .
5. At enhances days payable outstanding ( DPO ) by providing extended payment .
6. Provide Additional sweeps for liquidity .

Cost of UPAS LC / HBLC / CL :

Importer position :

1. LC issuing commission .
2. LC transmission charge .
3.  Acceptance commission .
4. Reimbursement charges .
5. Interest on funding UPAS LC .

Exporter position :

1. LC Advising charge .
2. LC confirmation charge .
3. Discrepancies charges .
4. Payment Charges .

Credit Period :

Normally it is for 180 days . In case of capital machineries credit trems would be 180/270/360/720 days .

Issuance is a Bank Guarantee .

Bank guarantee is a guarantee issued by a bank or a financial institute to reduce risks in transactions for both parties involved in the transactions in case of a contract breach In an event of a contractual obligation of the seller / exporter or a payment obligation to the seller / importer , the bank or the financial institute guarantees to indemnify the recipient against the contractual obligations of the exporter or the importer . With this , the risk factor will be reduced drastically for both parties in a contractual agreement while encouraging the transaction to proceed .

What is a performance guarantee ?

Performance guarantee is an assurance issued by a financial institute for meeting all the performance terms and conditions of the contract by the contractor With this , the client gets better security to guarantee job completion . If the contractor fails to perform all their obligations under the contract compensation is guaranteed for the client for their monetary losses . Performance guarantees are mostly used in the construction industry between contractors and clients and it’s mandatory financial for government projects .