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SBLC/BG is a guarantee of payment issued by a bank on behalf of a client that is used as "payment of last resort" should the client fail to fulfill a contractual commitment with a third party.
Standby letters of credit are created as a sign of good faith in business transactions and are proof of a buyer's credit quality and repayment abilities. The bank issuing the SBLC performs brief underwriting duties to ensure the credit quality of the party seeking the letter of credit, then sends notification to the bank of the party requesting the letter of credit (typically a seller or creditor). A standby letter of credit shows a company’s credit quality and ability to repay loans. Although SBLC/BG is not intended for use, it helps fulfil business obligations in case the business stops operations, cannot pay its vendors or becomes insolvent. Small businesses often face difficulty when securing financing. For this reason, standby letters of credit may be especially beneficial for encouraging investors to lend money to a company. In case of default, investors are assured they will be paid principal and interest from the bank through which the SBLC/BG is secured.
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Types of SBLC/Guarantees:
1. Performance guarantee – backs a commitment to perform other than to pay money/funds and includes an obligation to pay for loses occurring from a default of the buyer in the process of completing an underlying transaction. 2. An advance-payment Guarantee – supports an obligation to account for an advance payment made by the supplier to the buyer. 3. A bid-bond or tender-bond standby – backs an obligation of the buyer to execute a contract if the buyer is awarded a bid. 4. A counter standby – backs the issuance of another, separate standby letter of credit or other undertaking by the supplier of the counter standby. 5. A financial standby – supports an obligation to pay funds, including any instrument evidencing an obligation to repay borrowed money. 6. A commercial standby – backs the commitment of a buyer to pay for goods or services in the event of non-payment by other methods.
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