Standby Letter of Credit Monetization? Learn How It Works.
Letter of Credit Monetization
In reality, lending “against” a Letter of Credit or Standby Letter of Credit is not as simple as marketing slogans suggest. A genuine SBLC is already issued with assets or credit lines pledged to the bank, and rights over it are often already assigned to the original secured party. Without consent, creating a second secured loan over the same instrument is legally ineffective. That’s why any credible solution starts with understanding the full security position and structuring the deal accordingly.
The double pledge problem
An SBLC is usually backed by:
- Cash collateral held by the issuing bank.
- Assets pledged under the applicant’s credit facility.
- Personal or corporate guarantees to the issuing bank.
This means the issuing bank, or another lender, already has a first-priority claim. Trying to create another pledge without their consent leads to a “double pledge” — the second lender may have no enforceable right to payment if the SBLC is called.
Structuring solutions
When the SBLC itself cannot be pledged outright, there are still ways to integrate it into a funding structure:
- Assignment of proceeds: with issuing bank consent, the lender is paid directly if the SBLC is drawn.
- Back-to-back issuance: the SBLC is used as collateral for issuing another instrument that the lender can secure against.
- Inter-creditor agreement: between the existing secured party and the new lender, defining rights and priorities.
- Linked security package: the SBLC is part of a wider collateral mix including receivables, contracts, or tangible assets.
Beyond the instrument
The SBLC is a plus, but it is rarely the only element making a deal fundable. The real driver is the network of contracts and how they create reliable repayment flows:
- Underlying sales or project contracts generating cash flow.
- Security agreements over receivables, inventory, or other assets.
- Assignments and notices ensuring lender control over payment streams.
- Clear conditions precedent to disbursement and enforcement rights.
Evaluated case by case
Each transaction stands on its own merits. Lenders — especially private credit lenders with sector expertise — will look at:
- Borrower track record and financial strength.
- Strength and enforceability of the underlying contracts.
- Counterparty quality and payment history.
- Jurisdiction and governing law of the SBLC and other agreements.
A well-prepared borrower file, with contracts and financials in order, moves quickly from review to mandate.
Frequently asked
Can a lender just take my SBLC as collateral?
Only with issuing bank consent or if the SBLC is specifically structured for onward pledge.
Is this different from discounting?
Yes. Discounting applies to time-dated payment obligations; here the structure may be loan-based, security-based, or hybrid.
Do private lenders fund these deals?
Yes. Private credit lenders often move faster than banks and understand specific industries, but still require full documentation and enforceable rights.
Request a transaction review
If you hold an SBLC or Letter of Credit and want to explore funding options, send us the instrument details, underlying contracts, and borrower profile. We will assess the structure and propose solutions that avoid double pledge conflicts.
Start the ProcessThis page is informational. Any engagement is subject to independent credit approval, KYC and AML checks, and executed documentation. Terms vary by borrower, collateral, and lender appetite.
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