Standby Letters of Credit FAQ

You need security that your counterparty will perform or pay. You do not want to freeze all your cash. Welcome to the world of Standby Letters of Credit. This FAQ gives plain answers on what an SBLC is, how it works, when to use it, and what banks really care about. No fluff. Just the parts that help you close deals without tripping on wording or timelines.

Quick Fit Check

Frequently Asked Questions

1) What is a Standby Letter of Credit in plain English

An SBLC is a bank’s conditional promise to pay the beneficiary if the applicant fails to do something the contract requires. Think of it as a safety net. If the buyer does not pay, or the contractor does not perform, the beneficiary can present a short set of documents and claim under the standby. It is not meant to be used in normal operation. It sits in the background and supports trust so goods can ship or projects can start.

2) How is an SBLC different from a commercial Letter of Credit

A commercial LC is a primary payment mechanism. Banks check a thick stack of shipping documents and pay for goods. A standby is a backstop. It pays only if the applicant fails to meet an obligation and the beneficiary declares that failure using the agreed wording. In trade you might use a commercial LC to pay for the cargo, and a standby to secure a deposit or performance in the same deal. Different tools, different jobs.

3) SBLC vs bank guarantee vs demand guarantee

In function they are cousins. A demand guarantee under URDG is widely used in Europe, the Middle East, and Africa. A standby under ISP98 is more common in the U.S. and with international banks that follow those practices. Both are documentary instruments that pay on a compliant demand. Your choice often follows the beneficiary’s comfort, location, and the issuer’s preference. Pick the rule set that the beneficiary’s legal team recognizes and your issuing bank can support.

4) Which rules should we use: ISP98, UCP 600, or URDG 758

For standbys the market standard is ISP98. It was written for standby use cases like performance and financial obligations. URDG 758 is built for demand guarantees and works well for construction and performance security. UCP 600 can be used for standbys but is aimed at commercial LCs. Unless your counterpart insists on UCP 600, go with ISP98 or URDG 758 for clearer standby mechanics.

5) What types of SBLC exist

• Payment standby. Covers a failure to pay an invoice or contract amount.
• Performance standby. Covers failure to perform works or services, often tied to milestones.
• Advance payment standby. Secures the employer or buyer for an upfront deposit paid to the applicant.
• Bid bond standby. Secures tender obligations so the bidder does not walk after award.
• Financial standby. Covers rent, leases, or other financial obligations outside trade shipments.

6) Who are the parties in a standby

Applicant is the party whose performance is secured. Beneficiary is the party that receives payment if the applicant defaults. Issuing bank undertakes to pay on a compliant demand. Advising bank notifies the beneficiary. A confirming bank can add its own undertaking to pay if the issuing bank is not acceptable to the beneficiary.

7) When should I ask for confirmation on a standby

Ask for confirmation when the beneficiary refuses the issuer, when country risk is a concern, or when settlement speed matters. A confirmer stands in the middle and pays on a compliant draw then collects from the issuer later. You pay a fee for that extra certainty. If the issuer is a top rated bank in a safe jurisdiction, you may not need confirmation. If the beneficiary insists on it, budget for the cost upfront.

8) What does a clean standby wording look like

Good standbys are short and clear. They state the amount, expiry, rules, place of presentation, and the exact documents required to draw. The drawing documents are usually a signed demand and sometimes a simple statement that the applicant failed to perform or pay. Avoid long lists of operational documents. The more moving parts you add, the more chances you create for a refusal at the worst possible time.

9) Can a standby be transferable

Only if it explicitly says so. Most standbys are not transferable. Even when non transferable, beneficiaries can usually assign proceeds. That means the right to receive money can be assigned, not the right to make a demand. If the deal needs transferability, get it in the text from the start. Retrofits are painful and slow.

10) What fees should I expect

Fees are often charged as a quarterly commission on the outstanding amount. Expect setup fees, document or SWIFT charges, and amendment fees if you change terms later. If you add confirmation there is a confirmation commission. Pricing bands are driven by issuer rating, tenor, country risk, and collateral quality. If you want premium names and fast handling, it will cost more than a smaller regional bank. Pay for certainty when the shipment window is tight.

11) Do banks always demand 100 percent cash collateral

No. Some banks do. Many do not. Collateral mixes exist. Partial cash plus a pledge over receivables or project revenue is common. Counter guarantees from a partner bank are used in multi country deals. Surety paper and reinsured standbys can also support issuance in certain markets. Your story matters. If you present a tight contract stack, clear waterfall of cash, and a realistic reserve plan, banks will listen. When the file is messy and rushed, they default to cash blocks. Clean files save cash, period.

12) How do I reduce the cash block on an SBLC

• Negotiate a smaller amount with milestone reductions and expiry tied to real dates.
• Offer a pledge on secured cash flows such as a portion of PPA revenue or off taker payments.
• Use a counter guarantee from a bank that knows you well so the fronting bank can rely on it.
• Show a reserve plan that covers worst case draws with dated replenishment points.
• Provide a clean KYC and contract pack. Banks price friction. Remove the friction and you lower the ask.

13) How fast can a standby be issued

Speed depends on how complete your file is and whether the beneficiary accepts the issuer. With a clean pack and pre agreed wording, issuance can be quick. If legal teams trade redlines and the beneficiary insists on confirmation, budget more time. Do not plan first shipment or site mobilisation without a realistic timeline. Promise the impossible and you set yourself up for liquidated damages and angry emails.

14) What documents do banks ask for to issue a standby

• Company KYC for applicant and often for beneficiary
• Signed contract or purchase order with the security requirement
• Draft standby wording with rules, expiry, and draw conditions
• Financials, cash flow, and exposure summary for the facility
• Collateral details such as cash, receivables, or revenue pledge
• Beneficiary bank details and any issuer acceptability list

15) What are common wording mistakes

• Too many documents to draw. A standby pays on a simple demand. Keep it simple.
• Vague default language. The demand statement must match what the instrument requires.
• Wrong place of presentation. If the beneficiary cannot present in time, the protection is fake.
• Open ended expiry. Endless exposure makes issuers nervous and expensive. Use real dates or measured evergreen terms.
• Issuer not acceptable. If the beneficiary will not accept the bank, you have an expensive piece of paper no one will use.

16) What is an evergreen standby

Evergreen means the standby automatically extends unless the issuer gives notice of non renewal by a certain date. It reduces admin for long term obligations like leases or service contracts. Beneficiaries like it because they do not need annual paperwork. Issuers like to keep a window to step away with notice. Make sure the notice period and delivery mechanics are very clear or you will invite disputes.

17) How does a beneficiary make a claim

The beneficiary presents the exact documents listed in the standby by the expiry date at the place of presentation. Usually this is a signed demand and a short statement that the applicant failed in the required way. If the standby calls for any supporting document, present it exactly as required. No improvisation. No creative rewrites. If a courier or SWIFT is specified, use it. If originals are required, do not send copies. Details pay or kill a claim.

18) How long do banks take to examine a demand

Under common rule sets banks must decide within a defined banking day window or a reasonable time set by the rules used. What matters to you is practical timing. If you need fast settlement, keep the wording simple, make the place of presentation convenient, and avoid any third party proof that could cause delays. Also consider confirmation when country risk is sensitive or when you need sight funds without drama.

19) Can we draw partially or multiple times

Yes if the standby allows it. Many performance and advance payment standbys permit multiple drawings up to the face amount. Some payment standbys allow only a single demand for the full amount. If your risk is gradual, ask for partial drawing rights and spell them out in the text. No assumption here. If it is not written, it does not exist.

20) What are typical reasons a bank refuses a draw

• Presented after expiry. No leeway on dates.
• Presented at the wrong place. The instrument names the place. Use it.
• Demand wording does not match. The statement must track the text line by line.
• Missing required document. If the standby listed a certificate or notice, it must be there.
• Inconsistent amounts. Arithmetic or currency mismatch gets flagged.

21) What happens if the applicant disputes a draw

Standbys pay on documents, not on facts outside the instrument. If the demand is compliant, the bank pays and the dispute moves to the courts or arbitration under the contract. If you fear an abusive demand, negotiate tighter wording before issuance or require supporting confirmations in the text. Trying to fix a risky standby after issuance is painful and often impossible on your timeline.

22) SBLC for deposits and advance payments

Instead of wiring a full deposit, the buyer posts an advance payment standby. The seller gets security and can start production. The buyer preserves cash and pays a fee. Keep reduction mechanics linked to shipment or milestone dates so exposure falls as performance happens. Everyone sleeps better that way.

23) SBLC for construction and EPC

Employers ask for performance and advance payment standbys. Tie the expiry to substantial completion and handover. Add reductions after commissioning tests pass. Align the claim address with the employer’s location. Add step down events that reward progress. If liquidated damages exist, do not try to bury them. Acknowledge them in the risk conversation and price accordingly.

24) SBLC for leases and rent

Landlords often ask for a financial standby in place of a cash deposit. It is cleaner on your cash and easier to scale when you grow. Use evergreen language and a clear non renewal notice period. Make sure the rent default definition in the demand wording is simple and objective so both sides know exactly when a claim is valid.

25) What is MT760 and MT799 and why do people obsess over it

MT760 is the SWIFT message used to issue or amend a standby or guarantee. MT799 is a free format message banks use for pre advice or general messages. These are just plumbing. The message type does not make money appear. A clean instrument and a bank that actually issues it are what matter. Beware anyone selling the message type as a product. That is not how real banking works.

26) Can you lease an SBLC and monetize it

Leased SBLC pitches and monetization promises are where money goes to die. Real standbys secure real obligations. If someone offers easy cash against a leased standby with no underlying trade, step away. Banks issue standbys to support contracts. Not to support fantasies. If you need working capital, talk about receivables, inventory, or confirmed LCs. Those are fundable. Magic instruments are not.

27) How do FX and currency choices affect a standby

Use the currency of the underlying exposure when possible. If your project earns dollars, a dollar standby keeps things tidy. If you must use a different currency, add a hard limit and consider a buffer for rate swings. For cross border draws, confirm that the place of presentation and settlement currency match your beneficiary’s banking setup. Surprises at claim time cost friendships and money.

28) How do sanctions and jurisdiction risks show up in wording

Many banks include compliance and sanctions language. It should not give the issuer a free exit from clear obligations. If your corridor is sensitive, use a confirming bank in a jurisdiction the beneficiary trusts. Keep routing and advising lines realistic. The cleanest way to avoid drama is to work with banks that actually operate in your corridor and know the checks involved.

29) Can a standby be confirmed after issuance

Yes if a confirming bank agrees to add its undertaking on the issued text. That requires a review of the wording and the issuer’s risk. Some instruments are easier to confirm before issuance. If confirmation will be needed, plan it early and let the confirmer shape the text with you. You will save time and amendments later.

30) What is silent confirmation on a standby

Silent confirmation is a private agreement where a bank agrees to pay the beneficiary for a compliant demand even if the standby does not list them as a confirmer. It is a useful tool when the beneficiary wants extra comfort without changing the text. Pricing can be higher and corridor appetite matters. Use it when politics or bank acceptability complicate life and you still need certainty on payout.

31) How big should the standby be

Right size it. For deposits, match the advance amount and provide step downs as goods ship or milestones complete. For performance, size to realistic exposure, not a lazy round number. Oversizing makes banks nervous and expensive. Undersizing leaves the beneficiary irritated and unwilling to move. Data wins here. Bring a timeline, a cash forecast, and the logic behind the amount. You will negotiate from strength.

32) How do I pick the expiry date

Pick an expiry that covers the risk window with a small buffer. If the project slips, extend early. If the contract has defined handover points, use them for step downs or expiry. If you are dealing with seasonal shipments, align to the last shipment plus the likely dispute period. Precision reduces fees and makes everyone calmer.

33) What is the role of an advising bank on a standby

The advising bank authenticates and passes the instrument to the beneficiary. It does not promise to pay unless it also confirms. Pick an advising bank that can handle document flow fast and has the operations to process a claim without losing days. If your beneficiary has a strong bank, routing the standby through them as advising can speed communications and reduce confusion during a draw.

34) Can an SBLC replace a performance bond

Often yes. Many employers accept either a demand guarantee or a standby, provided the wording matches the contract. In some public sector tenders the form is fixed. Read the tender carefully. If both are acceptable, pick the instrument your bank can issue fast with fair pricing. For international EPC, a standby under ISP98 is widely recognized and practical to manage across borders.

35) What happens after a claim is paid

The issuing bank pays the beneficiary then turns to the applicant for reimbursement under the facility agreement and collateral documents. If there was a confirmer, the confirmer collects from the issuer. If the claim was wrongful, litigation follows outside the standby. That is why the standby itself must stay clean and documentary. Keep commercial fights in the contract, not in the instrument that pays on a claim.

36) Can a standby support open account trade

Yes. A seller may ship on open account and ask the buyer for a payment standby to cover non payment risk. The seller bills normally. If payment fails, they draw under the standby. This is common when a seller will not take a deposit yet wants protection, or when a buyer’s bank line is better used for a standby than for a commercial LC on every shipment.

37) What does a practical draw statement look like

Keep it short. Example language for a payment standby would be along the lines of: We hereby demand payment under Standby Letter of Credit number X for [amount] because the applicant failed to pay amounts due under contract [reference]. The exact words must match your standby. Do not improvise. If the text calls for a date or invoice number, include it. If it asks for a notice of default, attach it. Simple, precise, timely.

38) What can go wrong in cross border standbys

Issuer acceptability, sanctions checks, courier delays, and confusion on business days. Also watch time zone differences on expiry. A demand received after the cut off in the stated place of presentation can be treated as late. Build a buffer. If you plan to draw near expiry, deliver in person or use a trusted bank to present for you. Cheap shortcuts become expensive when the clock runs out.

39) How do I explain SBLCs to a board or investor who hates acronyms

Say this. We replaced large deposits and open ended risk with a bank promise to pay if something goes wrong. We pay a recurring fee instead of freezing cash. The instrument pays on a simple statement if the counterparty defaults. We sized it to real exposure and we can step it down as milestones pass. That is the story stakeholders understand and support.

40) What is your checklist for applicants

• Pick ISP98 or URDG 758 and keep wording short.
• Confirm issuer acceptability with the beneficiary before you start.
• Right size the amount and expiry with clear step downs.
• Agree the place of presentation that is easy for the beneficiary to use.
• Prepare collateral options and a reserve plan to reduce cash blocks.
• Deliver a clean KYC and contract pack on day one.

41) What is your checklist for beneficiaries

• Ask for ISP98 or URDG 758 unless local laws dictate something else.
• Demand a simple demand wording and avoid operational documents.
• Verify issuer and, if needed, ask for confirmation early.
• Make the place of presentation your city or a bank you trust.
• Test the draw statement against the text before you rely on it.
• Track expiry dates and extension notice periods in your calendar.

Three Real World Scenarios

How We Help You Get The Right Standby

Deliverables

• Named issuer and, if needed, confirmer route with contacts
• Standby wording pack under ISP98 or URDG 758 with clean draw statement
• Collateral plan with step downs, expiry logic, and fee band
• Checklist for presentation and a calendar of time sensitive dates

This FAQ is informational. Any standby letter of credit or guarantee is subject to issuer due diligence, independent credit approval, KYC and AML checks, and executed documentation. Rules, practices, and timelines depend on the instrument text, the banks involved, the countries in scope, and market conditions.