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A standby letter of credit (SBLC), also called a standby LC or SLOC, is a written commitment issued by a bank stating that the bank will pay a beneficiary if the bank’s client fails to perform a contractual obligation. The obligation can be payment, performance, delivery, or repayment of debt.
The instrument functions as a credit substitute. Instead of relying on the counterparty’s promise, the beneficiary relies on the issuing bank’s balance sheet. The bank becomes the risk bearer.
For a detailed operational overview, see our guide on standby letter of credit structuring and issuance.
Large transactions rarely rely on trust alone. A supplier, lender, or government authority needs assurance that obligations will be honored even if the counterparty encounters financial difficulty.
An SBLC provides that assurance. The bank effectively guarantees payment upon documented default.
Typical uses include international trade, infrastructure projects, construction performance guarantees, lease obligations, and credit facilities.
Only regulated banks and licensed financial institutions can issue a legitimate SBLC. Brokers, platforms, monetizers, and consultants cannot issue one.
The issuing institution must perform full credit underwriting and carry the contingent payment liability on its balance sheet. Because the bank is assuming risk, an SBLC issuance is legally equivalent to extending credit.
Most standby letters of credit are fully secured. The applicant pledges cash, securities, or bank-approved collateral. First-time issuers are commonly required to provide 100% cash collateral.
Some companies receive facilities supported by receivables, corporate guarantees, or operating cash flow. Banks evaluate audited financial statements, leverage ratios, and liquidity.
Unsecured SBLCs exist only for large, financially strong companies with established banking relationships. These effectively function as revolving credit facilities.
The cost depends on credit quality:
The bank charges a fee because it allocates regulatory capital and assumes payment liability.
If a company does not qualify for issuance, it must first build credit capacity. This is typically done through raising debt capital, bringing in equity investors, or obtaining third-party credit support.
Third-party collateral providers pledge capital on behalf of the applicant and charge annual fees because they are risking real balance-sheet exposure.
Standby letters of credit are commonly governed by International Standby Practices (ISP98) issued by the International Chamber of Commerce. These rules define default triggers, document presentation standards, and payment obligations.
The bank’s obligation is documentary. If compliant documents are presented, the bank must honor payment regardless of disputes between the parties.
Typical fraud schemes charge upfront “processing” fees while claiming a bank will issue a guarantee without underwriting. Banks do not sell SBLCs as products. They approve them as credit decisions.
The timeline ranges from two to eight weeks depending on documentation and credit profile.
We structure and place bank-issued standby letters of credit for real commercial transactions and projects.
Submit TransactionNo. An SBLC is a contingent payment obligation rather than funded debt. The bank does not disburse cash at issuance. It promises to pay only if the applicant defaults. Nevertheless, the bank treats it as credit exposure and performs underwriting similar to a loan approval process.
In regulated banking practice, standby letters of credit are never rented instruments. The issuing bank must underwrite the applicant because it assumes payment liability. Any offer advertising a leased SBLC without underwriting is almost always a fee-collection scheme rather than a legitimate financial transaction.
The bank becomes legally obligated to pay the beneficiary if the client defaults. Banking regulations require capital allocation against that risk. Collateral protects the bank’s balance sheet and allows issuance within prudential lending rules.
Clients with existing banking relationships may obtain issuance within two to three weeks after documentation is finalized. New applicants requiring underwriting and collateral structuring typically need one to two months due to compliance checks, credit committee review, and legal documentation.
Naveen Rashmi is a trade finance and bank guarantee specialist focused on documentary credits, standby letters of credit, and cross-border risk mitigation structures. He works on the structuring and review of SBLC, DLC, and performance guarantee transactions involving commercial banks, private credit funds, and commodity counterparties across North America, Europe, and emerging markets.
Naveen holds formal training in international trade finance operations, including documentary credit procedures, SWIFT messaging standards, and compliance processes applied by regulated banks. His work involves analyzing creditworthiness, preparing transaction documentation, reviewing SBLC wording under ISP98 rules, and coordinating issuance with bank treasury and compliance teams.
He regularly reviews standby letter of credit structures used in commodity trading, infrastructure projects, and corporate credit facilities. His responsibilities include verifying collateral support, assessing counterparty payment risk, and ensuring guarantee language aligns with International Chamber of Commerce standby credit practices.
This article reflects practical transaction experience with bank-issued guarantees and is written for commercial education purposes to help companies understand how regulated standby letters of credit actually function in real banking environments.
Financely advises growth-focused businesses on accessing capital by introducing their opportunities to professional investors. Financely is not a securities broker or dealer. Where appropriate, engagements are coordinated with regulated broker-dealers, investment banks, legal counsel, and other specialists.
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