A Standby Letter of Credit, commonly known as an SBLC, is a type of warranty for financial contracts. Performing essentially a backstopping function, the written obligations of an issuing bank to pay a sum of money to a beneficiary on behalf of their customer in the event that the customer does not pay the beneficiary.
It is important to note that SBLCs apply only in the case that the issuing bank’s commitment to pay is not contingent on the existence, validity and enforceability of its customer’s obligation. Benefits of using an SBLC include:
- Quick, flexible, simple, and affordable
- Allows the importer to establish a credit history with the exporter
- Save considerable time and financial resources with repeat business because the importer only needs to cover the maximum exposure risk of the exporter at any one time with one SBLC covering an entire year
- Ensures the delivery of goods or service in accordance with the terms of the trade contract
- Provides ease of payment as the bank only needs to establish default of payment or performance from a few document
- Payment from the importer is faster because once documents have reached the airport or port, only 3-7 days are required to review the documents and finalize the acceptance of the goods
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