Standby Letter of Credit (SBLC)
Bank guarantee that can be activated in the event of default by the debtor, a flexible alternative to traditional documentary credit.
Standby Letter of Credit (SBLC)
The SBLC is a bank guarantee by which the issuing bank undertakes to pay the beneficiary if the originator (the buyer) does not fulfill its contractual obligations. Unlike the classic documentary credit (which is a payment mechanism), the SBLC is a safety net.
Operation
Normal payment is made directly between buyer and seller (by transfer). The SBLC is only activated if the buyer defaults. The beneficiary then presents documents proving the failure to obtain payment from the bank.
Advantages compared to documentary credit
Less burdensome in terms of documentation, less costly, more flexible and better suited to regular commercial relationships. It covers both the proper execution of a contract and payment.
Applicable rules
SBLCs are governed by ISP98 (International Standby Practices) or UCP 600 of the ICC.
Usage
The SBLC is widely used in trade with the United States (where banks cannot issue traditional bank guarantees), in regular supply contracts and as a guarantee of good performance.
Cost
Typically 1 to 3% of the guaranteed amount per year, depending on country risk and buyer rating.