Understanding the difference between Standby Letter of Credit and Bank Guarantee?
1. What is Standby Letter of Credit (SBLC/SLOC)?
A standby letter of credit (SBLC or SLOC) is a guarantee of payment by a bank on behalf of their client. It is a loan of last resort in which the bank fulfills payment obligations by the end of the contract if their client cannot.
A standby letter of credit can also be abbreviated SBLC or SLOC. A standby letter of credit is different from a bank guarantee.
2. Types and Examples of Standby Letter of Credit (SBLC/SLOC)
Financial standby LOC: An exporter sells goods to a foreign buyer, who promises to pay within 60 days. If the payment never arrives (and the exporter required the buyer to use a standby letter of credit) the exporter can collect payment from the importer’s bank. Before issuing the letter of credit, the bank typically evaluates the importer’s credit and determines that the importer will repay the bank. But if the customer’s credit is in question, banks may require collateral (or funds on deposit) for approval.
Performance standby LOC: A contractor agrees to complete a construction project within a certain timeframe. When the deadline arrives, the project is not complete. With a standby letter of credit in place, the contractor’s customer can demand payment from the contractor’s bank. That payment functions as a penalty to encourage on-time completion, funding to bring in another contractor to take over mid-project, or compensation for the headaches of dealing with problems. This is an example of a “performance” standby letter of credit, and a failure to perform triggers the payment.
3. Advantages of a Standby Letter of Credit (SBLC / SLOC)
An SBLC helps ensure that the buyer will receive the goods or service that’s outlined in the document. For example, if a contract calls for the construction of a building and the builder fails to deliver, the client presents the SLOC to the bank to be made whole. Another advantage when involved in global trade, a buyer has an increased certainty that the goods will be delivered from the seller.
Also, small businesses can have difficulty competing against bigger and better-known rivals. An SBLC can add credibility to its bid for a project and can often times help avoid an upfront payment to the seller.
The SBLC / SLOC is often seen in contracts involving international trade, which tend to involve a large commitment of money and have added risks.
For the business that is presented with a SLOC/SBLC, the greatest advantage is the potential ease of getting out of that worst-case scenario. If an agreement calls for payment within 30 days of delivery and the payment is not made, the seller can present the SLOC to the buyer’s bank for payment. Thus, the seller is guaranteed to be paid. Another advantage for the seller is that the SBLC reduces the risk of the production order being changed or canceled by the buyer.
4. What is the Meaning of Bank Guarantee (BG)?
A bank guarantee is a promise from a bank or a financial institution that if a particular borrower defaults on a loan, the bank will cover the loss.
The bank guarantee signifies a lending institution ensures that the liabilities of a debtor is going to be met. In other words, if the debtor is unsuccessful to settle a debt, the bank will cover it. A bank guarantee allows the customer, or debtor, to acquire goods, purchase equipment or draw down a loan.
A bank guarantee acts similarly to a line of credit, except that a line of credit can be drawn upon at will by the bank’s client. A bank guarantee is used only if the client does not pay its vendor an agreed-upon amount. U.S. credit institutions are forbidden from assuming guarantee obligations, and therefore most international transactions require a standby letter of credit.
5. Types and Examples of Bank Guarantees
There are many different kinds of Bank Guarantee namely:
- A Payment Guarantee assures a seller the purchase price is paid on a set date.
- An Advance Payment Guarantee acts as collateral for reimbursing advance payment from the buyer if the seller does not supply the specified goods per the contract.
- A Performance Bond serves as collateral for the buyer’s costs incurred if services or goods are not provided as agreed in the contract.
- A credit security bond serves as collateral for repaying a loan.
6. The Process & How to Obtain a Bank Guarantee (BG) and Standby Letter of Credit (SBLC / SLOC)
Standby Letter of Credit (sblc/sloc) and Bank Guarantee (BG) are financial instruments issued by banks and other financial institutions such as Kingrise Finance Limited. These financial instruments are used to obtain loan and financing from banks, it can also be used for trade financing, foreign exchange transactions as well as in import and export transactions.
As with any business loan, you will need to provide proof of your creditworthiness to the bank. However, the BG, SBLC / SLOC approval process is much quicker, with letters often being issued within a week of all paperwork being submitted.
The best way to obtain a Bank Guarantee (BG) or Standby Letter of Credit (SBLC / SLOC) is through Kingrise Finance Limited.
Kingrise Finance Limited was incorporated in Hong Kong on 22-SEP-1999 as a Government Licensed Money Lender with CR No.: 0689078. We are leading providers of Business Loan, SME Loans, Project Financing, Recourse Loan, Non Recourse Loans and Bank Financial Instruments such as Standby Letter of Credit Funding, Bank Guarantee, Performance Guarantee Bond, Tender Bond Guarantee, Advance Payment Guarantee, Bank Comfort Letter, BG/CD/BD/BCL/DLC/LOC/SLOC/SBLC etc.
Our bank instruments, bg/sblc issuance and monetization process is simple, fast and efficient and we offer the best rates as well as the best LTV in the industry.
Our bank instruments, bg and sblc/sloc are issued from prime banks such as Barclays Bank London, Standard Chattered Bank, HSBC Hong Kong or any rated AAA bank of your choice. All our financial instruments are Cash-Backed and can be used as collateral to secure funding for projects, Discounting, Monetization and Private Placement Programs (PPP)..
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