STANDBY LETTER OF CREDIT (SBLC) EXPLAINED
By Financely.io
A Standby Letter of Credit (SBLC) is a bank’s written undertaking to pay a beneficiary if the applicant fails to perform an obligation. Think of it as a credit backstop. It sits behind a contract, a lease, a supply agreement, a bid, or a payment schedule, and it shifts performance risk from “Do we trust the counterparty?” to “Do we trust the bank?”
If you are a deal sponsor, operator, or buyer trying to close something real, an SBLC is often the cleanest way to satisfy security requirements without prepaying the full amount. It is also one of the most misunderstood instruments in commercial finance, which leads to poor structuring, delays, and avoidable rejections.
This guide breaks down what an SBLC is, when it is used, how banks underwrite it, what it costs, and how to prepare a lender-ready file that gets taken seriously.
What an SBLC is
An SBLC is a standby undertaking issued by a bank (the issuing bank) for the benefit of a third party (the beneficiary). The SBLC supports the applicant’s obligation under an underlying contract.
If the applicant defaults, the beneficiary can present a complying demand under the SBLC and receive payment from the issuing bank, subject to the SBLC’s terms.
Key point: the SBLC is independent of the underlying contract. The bank does not litigate the commercial dispute. The bank checks documents against the SBLC conditions. If the presentation complies, the bank pays.
That independence is why SBLCs are widely used in cross-border transactions and high-value contracts where enforcement through courts can be slow, costly, or uncertain.
What an SBLC is not
An SBLC is not a loan.
It is a guarantee-like instrument. It supports payment or performance, but it is not “money you borrow” on day one.
An SBLC is not “proof of funds.”
It can be part of a broader comfort package, but a standby is a conditional undertaking, not a bank statement.
An SBLC is not a magic substitute for weak credit.
Banks issue SBLCs based on credit approval, collateral, or both. If the applicant cannot be underwritten, the SBLC does not happen.
An SBLC is not a trading chip.
In real markets, counterparties care about bank quality, text, governing rules, and the applicant’s capacity. Anything pitched as “SBLC trading,” “platforms,” or “risk-free returns” is not how corporate standby issuance works.
Common SBLC types and real-world use cases
SBLCs are drafted to match the obligation. These are the most common categories:
A) Performance SBLC
Backstops performance under a contract. Common in EPC, construction, supply, and service agreements. If the contractor fails to perform, the beneficiary can call.
B) Payment SBLC
Backstops payment obligations. Common for commodity supply, equipment procurement, distributor relationships, and structured payment plans.
C) Bid SBLC (or Bid Bond style standby)
Supports a tender or bid. If the bidder withdraws or fails to sign after award, the beneficiary can call.
D) Advance Payment SBLC
Protects the buyer when an advance payment is made to a supplier. If the supplier fails to deliver, the buyer calls the standby to recover the advance.
E) Financial SBLC
Used to support financial obligations such as lease commitments, regulated obligations, or certain structured commercial arrangements. Financial standbys are often treated more conservatively by banks due to risk profile.
Each type changes the underwriting, the text, and the documentary conditions.
The parties in an SBLC transaction
Understanding roles prevents bad process and misrouted expectations.
Applicant
The party requesting the SBLC. The bank underwrites the applicant.
Beneficiary
The party receiving the SBLC and entitled to draw if conditions are met.
Issuing bank
The applicant’s bank that issues the SBLC and takes the credit risk on the applicant.
Advising bank
The bank that authenticates and advises the SBLC to the beneficiary (often via SWIFT). Advising is not a guarantee of payment. It is confirmation of authenticity and transmission.
Confirming bank (optional)
A bank that adds its own undertaking to pay, independent of the issuing bank. Confirmation is not automatic. It depends on issuing bank risk, country risk, tenor, structure, and price.
Reimbursing bank (sometimes used)
A bank that reimburses the paying bank. More common in documentary credit structures, but can appear in standby structures depending on setup.
Governing rules: ISP98 vs UCP600
Most SBLCs are issued subject to one of these rule sets:
ISP98 (International Standby Practices, ICC Publication 590)
Purpose-built for standby letters of credit. It matches typical standby mechanics, demand presentations, and default scenarios.
UCP600 (Uniform Customs and Practice for Documentary Credits, ICC Publication 600)
Designed for documentary letters of credit, but often used for standbys by market convention in certain sectors and regions.
Which is “better”? Neither is universally better. The right answer is what fits the transaction, the beneficiary’s requirements, and the banks’ comfort. Many sophisticated beneficiaries prefer ISP98 for standbys because it is tailored to standby behavior. Some markets still default to UCP600 because teams and banks have legacy familiarity.
A related point: demand guarantees often reference URDG 758 (Uniform Rules for Demand Guarantees). Those are not SBLCs, but you will see them in similar commercial contexts.
SBLC vs Documentary Letter of Credit (LC)
Both are bank undertakings. The difference is the trigger.
Documentary Letter of Credit
Designed to pay against shipping and trade documents for a specific shipment. It is “primary payment” in a trade flow.
SBLC
Designed as “secondary payment” or “backstop.” It is called only if there is a default.
You can run a commodity supply chain with LCs as the primary settlement tool and SBLCs as additional security for performance or deferred payment. They are not substitutes in all situations.
How banks underwrite an SBLC
This is where most requests break.
Banks treat an SBLC like a contingent liability. In many credit frameworks, it consumes facilities and capital similarly to funded exposure, especially for longer tenors or higher-risk profiles.
Banks typically look at:
A) Applicant credit profile
Financials, cash flow quality, leverage, liquidity, profitability, and track record.
B) Obligation and exposure
What is being guaranteed, for how long, and under what call conditions?
C) Transaction rationale
Is the underlying contract commercially sensible and documented?
D) Beneficiary profile
Counterparty risk, jurisdiction, sanctions considerations, and reputational risk.
E) Collateral and controls
Cash collateral, pledged securities, lien on assets, receivables assignment, margining, or other credit enhancement depending on the facility.
F) Facility structure
Is the SBLC issued under an existing facility? Is it a new facility? Is it revolving? Is it a one-off?
G) Compliance
KYC/AML, sanctions screening, source of funds, source of wealth where relevant, and sector restrictions.
If a request is “just issue the SBLC” with no coherent file, you get slow-walked or declined. That is normal. Banks are not being difficult. They are managing risk and regulatory obligations.
Typical SBLC pricing and cost components
Costs vary by bank, applicant risk, collateral quality, tenor, and whether confirmation is required.
You should expect cost elements like:
Issuance fee
Usually quoted as an annualized percentage applied to the SBLC amount, often billed quarterly or upfront depending on policy.
Negotiation and documentation fees
Legal, document review, internal credit work, and operational set-up.
SWIFT and advising fees
Transmission and bank-to-bank messaging costs.
Collateral costs
If cash-collateralized, you are tying up liquidity. If asset-collateralized, you may have monitoring, valuation, and security perfection costs.
Confirmation fee (if required)
Confirmation can materially increase total cost because the confirming bank is taking issuing bank risk.
There is no universal “cheap SBLC.” If you see a price that looks detached from credit reality, the issue is either hidden terms, non-bank behavior, or a structure that will not survive compliance.
Collateral, margining, and what “cash-backed” really means
Clients often hear “cash-backed SBLC” and assume it means the bank will issue against any cash held anywhere. In practice, banks want collateral under their control or in an acceptable custody arrangement.
Common collateral approaches:
A) Cash collateral at the issuing bank
The cleanest route. Fastest credit approval path. The trade-off is tied-up liquidity.
B) Pledged marketable securities
Possible with private banking relationships, custody structures, and clear haircuts. Not all banks do this for all clients.
C) Asset-backed security package
Harder. Requires valuation, liens, and monitoring. Common only for well-structured borrowers with established banking relationships.
D) Facility-based issuance
SBLC issued under a revolving credit facility, trade facility, or guarantee facility. This is typical for mature companies.
Banks apply haircuts. A “100% cash collateralized” standby can still face fees, minimums, and internal approval.
What beneficiaries typically require
Beneficiaries often impose requirements that must be mapped into the SBLC text:
Minimum bank rating or bank list
They want an issuing bank (or confirming bank) with acceptable credit quality.
Governing rules
ISP98 or UCP600 preference.
Form of demand
Simple demand wording or specific documents.
Expiry mechanics
Fixed expiry, evergreen with notice, or auto-extension provisions.
Jurisdiction
Governing law and place of presentation.
Advising bank requirements
They may require the standby to be advised through their preferred bank.
A frequent failure point is when the applicant requests issuance without first aligning on acceptable text. You get a standby that the beneficiary rejects. That burns time and credibility.
Timelines: what is realistic
If you already have a banking relationship and facilities, an SBLC can be issued quickly. If you are starting from scratch, timelines depend on underwriting depth and compliance.
Typical timeline drivers:
- How quickly you provide a clean KYC pack
- How complete your financials and supporting schedules are
- Whether the beneficiary text is agreed early
- Whether collateral is straightforward
- Whether confirmation is required
- Cross-border compliance checks
In real work, delays usually come from missing documents, inconsistent story, unclear sources and uses, and last-minute changes to text.
How we approach SBLC mandates at Financely.io
Our role is to take an SBLC request from “idea” to “bank-ready” and manage the workflow through issuance, subject to lender credit approval and compliance.
A serious SBLC process starts with underwriting. We pressure-test the transaction, validate the applicant’s capacity, and convert the request into a package a bank can actually approve.
What we typically produce and manage:
Underwriting memo
Clear summary of applicant, transaction, obligation supported, risk view, and mitigants.
Sources and uses
Where funds come from, how obligations are met, and why the SBLC is required.
Beneficiary and contract review
We align SBLC structure with the underlying contract so text and call conditions are coherent.
SBLC text coordination
Drafting and alignment with ISP98 or UCP600 requirements, plus beneficiary acceptance.
Collateral and security summary
What is pledged, how it is controlled, and what the bank needs to be comfortable.
Controlled data room
A structured set of documents so the bank’s credit team can move without back-and-forth chaos.
Lender outreach and execution coordination
Where regulated execution is required, delivery is coordinated through appropriately licensed firms under their own approvals.
This is best-efforts advisory and arrangement work. We do not issue SBLCs ourselves. Issuance decisions sit with banks and their credit committees.
What you should prepare before requesting an SBLC
If you want speed and a real answer, build your file like a professional borrower.
Minimum starting pack:
Corporate documents
Registration, ownership, directors, signatories.
KYC and compliance documents
IDs, proof of address, UBO disclosures, and supporting compliance materials.
Financials
Audited or management accounts, plus interim updates where needed.
Banking information
Bank statements, facility summaries, existing limits, and relationship context.
Underlying contract
Executed contract or near-final version, plus key commercial terms.
SBLC requirements from beneficiary
Required wording, issuing bank criteria, governing rules, expiry, and advising instructions.
Collateral evidence
Proof of cash, securities, or asset collateral availability and control.
If any of these are missing, expect delays. Banks do not guess. They document.
FAQ: fast answers to common SBLC questions
How much does an SBLC cost?
Costs are driven by applicant risk, collateral, tenor, and bank policy. Expect an annualized issuance fee plus bank charges, and potentially confirmation fees.
Can I get an SBLC without collateral?
Possible for strong credits with existing facilities or strong relationship banking. For most applicants, collateral or a credit facility is required.
Can an SBLC be non-recourse?
“Non-recourse” is a lending term. An SBLC is a contingent obligation. The bank’s recourse is typically against the applicant under the facility and security documentation.
How long can an SBLC run?
From a few months to multiple years. Longer tenors increase underwriting scrutiny and cost.
Does the beneficiary need confirmation?
Sometimes. It depends on issuing bank risk, country risk, and beneficiary policy. Confirmation adds cost and complexity.
Is an SBLC the same as a bank guarantee?
They are similar in commercial purpose. The legal form differs. SBLCs are letters of credit governed by ICC rules like ISP98 or UCP600. Guarantees often follow different frameworks.
Practical checklist: how to avoid rejection
Before you submit, sanity-check these points:
- The underlying contract is coherent and signed or near-final
- The beneficiary requirements are in writing
- The SBLC text is aligned with beneficiary acceptance
- Your financials and story support the requested amount
- Collateral is real, provable, and controllable
- KYC is complete and consistent across documents
- You are not changing structure midstream
Most “no” decisions come from mismatch: the requested instrument does not fit the applicant’s profile, or the documentation does not match how banks approve contingent liabilities.
Closing note and disclaimer
An SBLC is a powerful tool when it is used properly. It can unlock bids, secure supply, satisfy landlords, support advance payments, and reduce counterparty anxiety in high-stakes deals. It also demands respect: real underwriting, clean documentation, and bank-grade process.
Financely.io provides advisory, underwriting support, and arrangement coordination on a best-efforts basis. We are not a bank and do not issue SBLCs. Any issuance is subject to diligence, KYC/AML, sanctions screening, credit approval, and final documentation under the issuing bank’s own processes and approvals.
If you want an SBLC that stands up in the real world, start with a lender-ready file, not a one-line request. Reach us at https://financely.io.
