What Is a Financial Standby Letter of Credit?

The investment field is full of terms that may be unfamiliar to the inexperienced investor. Whether you are interested in becoming involved in this area of finance or you need to brush up on the meanings of the terms, understanding SBLC financing is essential. Learning what a financial standby letter of credit is and how it is used can help you make the smart choice in your financial endeavors.

The Definition

SBLC financing refers to the promise of the bank to provide financing once a purchase has been made. When individuals attempt to buy large amounts of product, it becomes a risk for the seller to trust the buyer will have the funds needed to fully pay for the purchase. To provide this assurance, the bank issues a standby letter of credit to guarantee payment to the seller. If the buyer defaults, there is a backup plan in place to produce the promised funds.

An Indisputable Promise

One of the biggest problems investors and sellers may have is when one party disputes the payment. With certain types of credit, this dispute can put a hold on the payment, causing problems for the seller. However, if investors use a financial standby letter of credit to secure payment, there is no disputing the payment. Even if the buyer defaults on the payment, the funds are assured.

A Backup Option

The primary purpose of SBLC financing in investing is to create a backup option to ensure the seller receives payment for the product, regardless of what happens. Because this requires capital or other collateral to back up the letter of credit, these documents are typically issued by banks or similar lenders. They have the funds necessary to cover these large purchases.
A financial standby letter of credit is typically used with larger international transactions. Many sellers are reluctant to come to an agreement with a buyer who isn’t willing or able to obtain SBLC financing as a method of backing up the transaction. This letter of credit provides all parties involved in the transaction with the security they need to move forward in their agreement. Obtaining one of these letters offers an indisputable promise that includes a backup option to cover the cost of the transaction if they buyer defaults on the original loan.