In larger transactions, counterparties are less interested in promises and more interested in hard comfort that payment will be made if something goes wrong. Buyers, project sponsors and service providers can look creditworthy on paper, yet sellers, lenders and project owners still want a formal guarantee behind the contract.
A Standby Letter of Credit, or SBLC, is one of the most widely used tools for that purpose. It sits in the background as a bank-issued guarantee, ready to be drawn if the applicant fails to pay or perform. When structured correctly under rules such as ISP98 or UCP 600, an SBLC gives beneficiaries clear recourse without turning every dispute into a long court process.
This guide explains what an SBLC is, where it is used in trade, project finance, real estate and M&A, how costs are set and what businesses should expect during the application process. It also outlines how Financely Group works with clients to arrange SBLC issuance through regulated banks and private credit providers for qualifying transactions.
An SBLC is a written undertaking by a bank or regulated credit provider to pay a named beneficiary on demand, up to a stated amount, if the applicant fails to meet agreed obligations. In simple terms, it is a safety net that supports payment or performance under an underlying contract.
SBLCs are typically issued subject to international rules that standardise rights and obligations:
Unlike a traditional commercial letter of credit, which is used as the main payment mechanism in trade, an SBLC usually only comes into play if the applicant defaults or the contract performance fails. In day-to-day language, it acts as a back-up promise from the bank that stands behind the applicant’s obligations.
SBLCs appear across trade, projects, real estate and corporate transactions wherever one party needs comfort that the other will honour its commitments. The main use cases follow similar patterns.
In cross-border trade, exporters face the risk that importers do not pay after shipment. Importers may be unwilling to pay in full upfront before they see the goods. An SBLC in favour of the exporter can reduce this tension by giving the seller a right to draw if the buyer fails to pay against agreed documents or milestones.
The SBLC may support open account terms, supply contracts or framework agreements, especially where repeated shipments are involved and the parties want a clean fallback rather than using a full commercial letter of credit for every shipment.
In energy, infrastructure and large construction projects, SBLCs are used to secure obligations such as advance payment refunds, performance guarantees or debt service reserves. Sponsors may be required to provide an SBLC to backstop equity injections, cost overruns or support during early operating periods.
Lenders and project owners value SBLCs in these settings because they can be drawn quickly after a compliant demand, without waiting for lengthy dispute processes on the underlying project contracts.
In commercial real estate, SBLCs can support tenant lease obligations, secure deposits for acquisitions or guarantee milestone payments under development agreements. Landlords and sellers may accept a standby from a recognised bank instead of a large cash deposit tied up for months.
This lets buyers or tenants preserve liquidity while still giving counterparties comfort that they can call on the SBLC if obligations are not met.
Buyers in M&A transactions may issue SBLCs to guarantee purchase price adjustments, deferred payments or earn-out structures. Sellers see the SBLC as a credit enhancement on the buyer’s obligations, especially if the buyer is a new or foreign entity they do not know well.
SBLCs can also back bid bonds or break fees in auction processes where sellers want tangible assurance that bidders can perform if selected.
Service providers, contractors and suppliers use SBLCs to support performance obligations under contracts. A performance standby may be callable if the contractor fails to complete the work, meet agreed standards or remedy defects within defined time limits.
Employers and counterparties often prefer SBLCs over corporate guarantees because claims are handled through the documentary credit framework under ISP98 or UCP 600, with more predictable outcomes for compliant demands.
When a recognised bank stands behind a client, counterparties take notice. An SBLC signals that the applicant has passed credit checks and that the bank is prepared to put its name and balance sheet behind the client up to a defined amount. This can make bids more competitive and help secure contracts against rivals who rely only on corporate promises.
From the beneficiary’s side, an SBLC reduces the risk of non-payment or non-performance. If the applicant defaults and the beneficiary can present a compliant demand and supporting documents, the issuer is obliged to pay under the rules governing the standby. That separation between underlying dispute and documentary claim is a core feature of standby credits.
Many tenders, framework agreements and large supply or project contracts explicitly require SBLCs, advance payment guarantees or performance standbys as a condition of award. Without these instruments, smaller or mid-market companies may be locked out of opportunities that depend on demonstrable security for counterparties.
SBLCs can support a wide range of obligations: payment for goods, lease commitments, project equity support, bid bonds and more. They can be tailored in amount, tenor, governing rules and trigger conditions. In some structures, SBLCs are also used as credit enhancement to support borrowing from lenders who rely on the standby as additional security.
Pricing for SBLCs reflects the applicant’s credit quality, the size and tenor of the standby, the sector, jurisdiction and the issuer’s appetite for the underlying risk. Costs are usually expressed as a percentage per year on the face amount of the SBLC, plus one-off fees.
| Cost Component | Description |
|---|---|
| Annual SBLC Fee | Typically in the range of 0.5 percent to 3 percent per year of the SBLC amount, charged for as long as the standby is outstanding. Riskier applicants, longer tenors and complex structures sit at the higher end of the range. |
| Arrangement or Commitment Fee | One-off fee charged at issuance or on commitment to cover credit analysis, documentation and internal approvals at the issuing bank or lending partner. |
| Collateral or Cash Margin | Some issuers require partial or full cash margin or other collateral for the SBLC. This carries an opportunity cost because funds are blocked or liens are registered over assets. |
| Legal and Advisory Costs | Legal review of the standby wording, negotiation of conditions and any related security documents, plus advisory costs where external advisers are engaged. |
Applicants should consider both the fee percentage and the impact of margin or collateral requirements on liquidity. A slightly higher annual fee with lower cash blocking can be more attractive than a cheaper fee on a fully cash-backed standby that ties up working capital.
The application process resembles other forms of credit. Issuers want to understand the applicant’s financial position, the underlying transaction and the specific risk they are being asked to cover.
The first step is to define exactly what the SBLC will secure: trade payment, performance, lease obligations, equity support or something else. The purpose drives the wording, rule set (ISP98 or UCP 600), tenor, amount and any special conditions for calling the standby.
Issuers usually require:
Strong applicants with existing banking relationships may obtain SBLCs directly from their main banks, which already understand their risk profile. Others, especially in higher growth or more complex sectors, may need to work with private credit funds, trade finance providers or alternative SBLC issuers.
These lenders and credit providers can be more flexible on structure and jurisdiction, but still expect solid information and realistic collateral or margin terms.
Once an issuer is interested, the parties negotiate the key points:
After approvals, documentation and any collateral arrangements are finalised, the SBLC is issued, usually via SWIFT to the beneficiary’s bank. From that point, the issuer is on risk up to the face amount until expiry, cancellation or replacement. The applicant must monitor expiry dates, renewal conditions and covenants attached to the standby.
Businesses often know they need an SBLC but are unsure which issuers are credible for their counterparties, what fee levels are realistic or how to present their case in a way that fits bank credit processes. At the same time, many encounter intermediaries promising easy SBLCs without real underwriting or clear bank issuers, which wastes time and damages trust.
Financely Group works with clients that seek genuine SBLC solutions for trade, projects, real estate and corporate transactions. Through regulated partners and recognised banks and lenders, we help:
Mandates are handled on a best-efforts basis, with transparent discussions about fees, conditions, timelines and the likelihood of approval based on the applicant’s profile and collateral.
SBLCs give counterparties confidence to sign larger contracts, ship goods and award projects by providing a credible route to payment if obligations are not met. For buyers, sponsors and service providers, they can be the key that turns a tentative opportunity into a binding agreement.
If your business needs an SBLC for trade, project finance, real estate or M&A, early preparation makes a significant difference to outcomes. Financely Group can help assess your needs, shape a realistic request and connect you with issuers through regulated partners who are equipped to evaluate and structure the standby.
Share your transaction summary, financials and SBLC requirements with our team to explore issuance options from global banks and private credit providers through our regulated partner network.
Request SBLC OptionsDisclaimer: This page is for general information only and does not constitute legal, tax, accounting or investment advice. Financely Group acts as advisor and arranger through regulated partners and is not a bank or direct lender. Any Standby Letter of Credit, guarantee, financing structure or capital raising process is subject to underwriting, KYC, AML, sanctions screening, legal review, documentation, perfected security and approvals by relevant stakeholders. No public offer or solicitation is made on this page.
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