How Much Does a Standby Letter of Credit Cost?
How Much Does A Standby Letter Of Credit (SBLC) Cost To Issue And Maintain
What A Standby Letter Of Credit Is
A Standby Letter of Credit is an independent bank undertaking to pay on demand against a compliant presentation. The market default is International Standby Practices ISP98. Some beneficiaries request UCP 600 language, yet ISP98 is usually better aligned to standby practice. An SBLC is separate from the commercial contract. Payment is triggered by the exact draw statement and any supporting documents named in the text.
Common Types Of SBLC And When Each One Fits
- Backs payment obligations on delivery or completion.
- Often used where open account terms are not acceptable to the seller.
- Protects a deposit or prepayment by the buyer.
- Draw statement confirms failure to deliver or repay the advance.
- Supports tender validity and prevents frivolous bids.
- Covers performance obligations under an EPC or supply contract.
- Draw statement references non-performance or default events defined in the text.
- Backs post-completion obligations and defect remedy periods.
- Used in real estate and equipment leases to secure rent and damages.
How Much An SBLC Costs To Issue And Maintain
Collateral Requirements And How Banks Think About Them
Collateral depends on the applicant’s financial strength, track record, and country. Strong corporates with proven cash flows may obtain unsecured issuance with covenants and cash management. Mid-market applicants often post 10% to 50% cash margin or pledge liquid collateral. New or thinly capitalised applicants may be asked for 100% cash margin, a standby counter-guarantee from a higher-rated bank, or additional security such as a receivables assignment or a charge over deposits. Where the beneficiary, corridor, or sanction profile raises risk, collateral asks rise and confirmation may be mandatory.
Underwriting Steps And How Long It Takes
- KYC And Sanctions. Corporate documents, ownership chart, directors, flows, and purpose. Typical timing three to ten business days depending on jurisdiction and completeness.
- Credit Assessment. Financials, bank statements, contract review, and collateral analysis. Typical timing five to ten business days for a first file.
- Drafting And Beneficiary Pre-Acceptance. We produce a full ISP98 text with exact draw statement, expiry, place of presentation, and law. Beneficiary confirms in writing. Typical timing two to five business days.
- RMA And SWIFT Setup. Banks confirm messaging permissions and routing. Typical timing one to three business days.
- Issuance. Once conditions precedent and margin are in place, issuance follows on the same or next business day.
Clean files often close in seven to fifteen business days. Cross-border fronting and complex performance standbys can take ten to twenty five business days due to local counsel and platform steps.
Issuance Guidelines That Prevent Disputes
- Use ISP98 unless the beneficiary mandates UCP 600. Demand guarantees under URDG 758 can be a workable alternative where local practice prefers guarantees.
- State applicant, beneficiary, face amount, currency, and clear expiry. For evergreen, set an automatic extension with a ninety or sixty day non-renewal notice.
- Define the place for presentation, whether originals are required, and the number of originals. Electronic presentation rules should be explicit if allowed.
- Write an objective draw statement. Avoid subjective tests and external contracts that the bank cannot verify.
- Clarify transferability, assignment of proceeds, and governing law. Transferability is uncommon for standbys and should be avoided unless essential.
How An SBLC Is Delivered And Amended
- Issuance via MT760 to the advising or beneficiary bank.
- Amendments via MT767. Status or clarifications via MT799 or MT199 where appropriate.
- RMA permissions and test keys confirmed before transmission.
- Hard copy on bank letterhead if the beneficiary mandates originals by courier.
- Approved e-guarantee platforms in markets that require electronic form.
- Fronting through a domestic bank supported by a counter-guarantee where only a local issuer is accepted.
Maintenance, Renewals, And Ongoing Costs
- Quarterly commissions continue until expiry or cancellation. Reductions pro-rate if face amount is reduced.
- Extensions and increases trigger incremental commission and amendment charges.
- Annual reviews for multi-year programs include financial updates and confirmation of sanctions and KYC.
- If a confirming bank is on risk, its renewal fee applies at each extension.
How To Raise Capital If Collateral Is Not Sufficient
- Senior secured working capital facility to fund the cash margin for issuance.
- Preferred equity or mezzanine to top up margin for performance or advance payment standbys.
- Counter-guarantee from your relationship bank to a fronting bank acceptable to the beneficiary.
- Trade credit or political risk insurance to widen confirming capacity where beneficiary insists on confirmation.
- Switch to a demand guarantee under URDG 758 if the beneficiary accepts that form and pricing is better.
- For payment risk, replace part of the standby with a confirmed documentary credit and discount proceeds at sight.
- Use a special purpose vehicle with assignment of proceeds and controlled accounts so lenders can take comfort in cash control.
- Place unfunded risk participation behind your issuing bank so limit and pricing improve without changing the front bank.
Documents We Need To Start And Speed
- Underlying contract or tender with scope, milestones, and law.
- Beneficiary wording or acceptance criteria if any exist.
- Corporate documents, ownership chart, latest financials, and twelve months of bank statements.
- Draft draw statement, expiry date, presentation place, and confirmation preference.
Frequently Asked Questions
Request An SBLC Plan, Pricing, And Issuance Route
Share your contract pack, target face amount, tenor, and beneficiary requirements. We will return with draft wording, the bank and confirmation route, and a delivery plan to issuance.
Start Structured Commodity FinanceThis article is for corporate users. It is not legal advice and it is not a commitment to lend or issue. Any standby is subject to know-your-customer checks, anti-money-laundering controls, sanctions screening, credit approval, and beneficiary acceptance of the final text.
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