An SBLC is a financial instrument issued by a bank that assures payment to the beneficiary if their client fails to meet the necessary payment obligations. Primarily used for transactions involving material product purchase and delivery, a Standby Letter of Credit is offered with a maximum credit period of one year. One of the most significant advantages of SBLC funding is that it permits product purchase in multiple shipments as the credit balance is being paid down or replenished. Such a guarantee further ensures uninterrupted and straightforward trade activity during the length of the contract period. The face value of an SBLC bank guarantee covers the entire contract amount, and the charges are levied accordingly.
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Unlike with a line of credit where the borrower pays interest and other fees for the capital he draws on; Standby Letters of Credit are charged based on the total cost of goods during the time at which the instrument is issued
For an applicant to receive an SBLC letter of credit from a bank, he'll need to prove the creditworthiness of his business to the financial institution. The process in itself is quick and straightforward, with the letter commonly issued within seven working days after all the necessary paperwork is submitted. Banks usually charge a credit fee of between 1-10% of the SBLC amount to publish the letter, and the subsequent cost needs to be paid yearly as long as the letter of credit remains active. However, if the applicant can honor the contract obligations before the end of the stipulated contract period, they'll be able to cancel the same without needing to pay the additional fees.
Unlike a performance SBLC, financial SBLC is an irrevocable obligation that a bank offers to a beneficiary if in case their client fails to meet the necessary monetary commitments. Financial SBLCs are commonly used by trading companies where it’s difficult to secure an alternative form of payment protection.
This type of Standby Letter of Credit is a binding obligation that a bank makes to a beneficiary, stating that they will reimburse the payment if their client fails to meet non-financial commitments such as the quality of work, and timeframe as listed in the contract.