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What is the Difference Between ‘Leasing” a Standby Letter of Credit and Purchasing a Standby Letter of Credit?

Written by admin on . Posted in Blog.

What exactly is a Standby Letter of Credit and what are its uses in todays markets? A Standby Letter of Credit is a financial instrument. It is issued by banks upon instructions received from their clients. It is a means of payment, but can also be a guarantee of payment as explained below. 

Standby Letter of Credit as a Means of Payment 

A Standby Letter of Credit underpins many international trade transactions. It is a payment of last resort. It is issued when a seller is uncertain of payment from the buyer. The buyer will request their bank to open a Standby Letter of Credit in favour of the seller. If the buyer fails to pay the seller, the seller will claim against the Standby Letter of Credit. 

Standby Letter of Credit as a Guarantee of Payment 

A Standby Letter of Credit is sometimes used like a Bank Guarantee as a guarantee of payment. The verbiage contained within the Standby Letter of Credit will have to mirror that of a Demand Bank Guarantee. A Demand Bank Guarantee is utilised for monetisation purposes only. 

Both the Standby Letter of Credit and Demand Bank Guarantee will be governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). They will both be payable on first demand. 

‘Leasing’ a Standby Letter of Credit  

A Standby Letter of Credit can only be “leased” if it is being used as a guarantee of payment. As advised above it must conform to and be governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). 

Standby Letters of Credit can be “leased” from companies known as providers. Typically, the “lease” will be for one year. The beneficiary will pay the provider a fee known as a Collateral Transfer Fee. Currently this is around the 6% mark. 

Purchasing a Standby Letter of Credit  

It is not possible to purchase a Standby Letter of Credit.  It is only possible to instruct a bank to issue one on your behalf and of course to receive one that a third-party has issued to you. Once issued, a Standby Letter of Credit (SBLC) cannot be bought and sold. It related only to a designated transaction.