How to Distinguish Legitimate Standby Letter of Credit Applications from Non-Executable Requests in Trade Finance Transactions
Trade Finance Instruments

How to Distinguish Legitimate Standby Letter of Credit Applications from Non-Executable Requests in Trade Finance Transactions

Standby Letters of Credit are widely used in international trade to secure performance and payment obligations. They are also among the most frequently misrepresented instruments presented to lenders and financing desks.

Trade finance providers often receive requests for SBLC issuance or monetization tied to investment programs, speculative commodity trades, or undefined counterparties. The difficulty is not technical underwriting. The difficulty is determining whether the request relates to an actual commercial obligation.

An SBLC is a contingent payment undertaking supporting a real contractual obligation. If the underlying obligation is unclear, the instrument request is unlikely to be executable.

What a Legitimate SBLC Request Looks Like

Defined Commercial Contract

The applicant can present a signed agreement requiring performance security or payment assurance.

Identifiable Beneficiary

The beneficiary is an operating company participating directly in the commercial transaction.

Clear Purpose

The SBLC secures a supply contract, lease obligation, construction agreement, or trade payment.

Proportional Amount

The requested instrument size corresponds to the value and risk of the underlying contract.

Indicators of Non-Executable Requests

When an SBLC request exists independently from a defined commercial obligation, underwriting should pause before credit review begins.
  • references to investment or trading programs rather than a contract
  • requests for large instrument values without transaction detail
  • beneficiaries not involved in a real supply or service relationship
  • focus on monetization rather than contractual performance

Private Placement and Instrument-Driven Proposals

A common pattern is a request for a standby letter of credit to participate in an external program promising trading returns. In such cases, the SBLC is presented as the transaction itself rather than security supporting an existing obligation.

In structured finance, the instrument supports commerce. It does not create revenue by its mere existence.

Commercial Transaction

The contract exists first and financing supports performance.

Instrument-Driven Proposal

The financing instrument is requested before any verifiable commercial activity.

Screen SBLC Applications Before Underwriting

Financely structures intake processes requiring contractual documentation and transaction clarity before a request reaches a financing desk.

Minimum Documentation to Request

  • underlying commercial contract
  • beneficiary corporate information
  • transaction description and timeline
  • purpose of the standby letter of credit

When these documents are unavailable, the request should be classified as preliminary discussion rather than a financeable transaction.

An SBLC should always be traceable to a contractual obligation. If the obligation cannot be verified, the request cannot be evaluated.

Operational Benefit of Early Screening

Preserved Underwriting Capacity

Credit teams spend time on executable transactions.

Improved Counterparty Engagement

Applicants approach financing with clear commercial objectives.

Reduced Compliance Risk

Requests linked to unclear economic purpose are identified early.

Predictable Pipeline Quality

Deal flow becomes structured rather than speculative.

Establish a Structured Trade Finance Intake Channel

Financely operates borrower and transaction intake routing designed to filter non-executable instrument requests before they consume internal resources.

Financely provides intake and routing services only and does not act as a bank or issuer of financial instruments. All underwriting, compliance review, and credit decisions remain with the financing institution.