If you have just entered the world of importing or exporting, you have likely read about letters of credit. Of course, if you are still finding your footing, it’s quite possible (and understandable) that you aren’t entirely certain what a letter of credit is. Don’t worry, we’ll be covering that in this article. Specifically, we’ll be discussing the standby letter of credit, which you may have also seen referred to as an “SBLC”. Read on to find out what an SBLC letter of credit is and how you can use it to create a firm trust between you and everybody you do business with.
What is a Letter of Credit?
Before we take a look at the specifics of the standby letter of credit, let’s take a moment to discuss the letter of credit as a concept. When an importer makes a deal to purchase goods from an exporter, they may turn to a financial institution to provide them with a letter of credit. This is a guarantee from the issuer that payment will be sent the moment the seller fulfills the terms outlined in the letter itself.
Where Can I Get a Letter of Credit?
A letter of credit can be secured from a number of financial institutions. In the United Arab Emirates, many importers rely on banks when a letter of credit is needed. However, more and more people are turning to independent financial institutions in an attempt to combat the additional charges of going to a bank. This is particularly common in Dubai, where many of the UAE’s most prominent importers are based.
What is a Standby Letter of Credit?
A standby letter of credit serves much the same purpose as the traditional letter of credit. It ensures the seller will be paid for their goods as long as they are able to meet the requirements outlined in the document. The difference, however, is that a standby letter of credit is intended to act only as a last resort. If a buyer is for some reason unable to cover the cost of their purchase, they can revert to their standby letter of credit as a sort of insurance policy.
Performance SBLC
There are two types of standby letters of credit: the performance SBLC and the financial SBLC. The former refers to the actual duties expected to be carried out by the person receiving funding. While these duties do not include making a payment, they can include providing quality goods, meeting a certain delivery time, and keeping to good business manners. If the subject of the performance SBLC fails to meet the standards outlined by the document, the person providing funding will be expected to make a payment.
Financial SBLC
Just as the performance SBLC refers to the performance of a particular party, the financial SBLC covers the financial obligations of a particular party. This is comparable to the traditional letter of credit as it ensures the named party will make payment for the goods and/or services they receive. It is extremely advantageous when making deals with overseas parties, especially in the UAE, as Western sellers are often unfairly skeptical of a buyer’s ability to fulfill their financial obligations.