A Standby Letter of Credit or SBLC is a crucial financial instrument required in business transactions and international trade. SBLC can be of two types, one that provides a guarantee of payment and the other that provides a guarantee of performance. SBLC holders can monetise these instruments to have access to the funds allocated to the SBLC before its date of maturity.
Monetization of SBLC requires the holders to complete multiple complex steps. The section below will help you understand these steps.
The Purpose of SBLCs
Before you know how to monetise SBLCs, you must understand the primary purpose of these financial instruments. SBLCs represent financial guarantees issued by financial institutions or banks for their customers. To be more precise, an SBLC is a payment assurance, which ensures that the beneficiary gets paid even when the applicant fails to pay as per the contract.
The Process of SBLC Monetisation
Step 1: Obtaining SBLCs
It’s needless to say you will need to have an SBLC with you to monetise it. As mentioned above, these financial instruments are mostly issued by banks or private business lenders. The project owner or buyer will have to request the bank/financial institution to issue an SBLC, which will remain payable to the mentioned beneficiary.
Step 2: Finding a Trusted Monetisation Partner
To monetize SBLC seamlessly, you will need to find a trusted investor or financial institution interested in purchasing or lending against SBLCs. You must ensure that the partner you pick has a good track record in this sector.
Step 3: Conducting Due Diligence
Your monetisation partner will conduct due diligence to evaluate the SBLC’s feasibility and legitimacy. Experts representing the organisation will check the SBLC clauses thoroughly and verify the issuing bank’s credibility. They will also work to ensure that the transaction covered by the SBLC is feasible.
Step 4: Negotiating Terms
The next step will involve negotiation of SBLC terms. Some areas that require negotiation include interest rates (for loans), monetisation fees, repayment terms, etc.
Step 5: Getting the Documents Ready
The process of monetizing SBLC will require you to manage lots of documents. Examples include loan agreements (if the SBLC has links to a loan), sale agreements, various legal documents, etc. Having all these documents ready makes the process slightly less complicated.
Step 6: Disbursal
In this step, the entity holding the SBLC receives funds from the monetisation partner as per the terms and conditions of the monetisation agreement. Upon receiving the funds, the beneficiary can use it for purposes mentioned in the agreement. Here, you must note that failure to stick to the terms and conditions of the agreement can result in financial losses and legal issues.
Step 7: Repayment
The beneficiary must repay the monetisation partner as per the agreement. Using the funds for purposes discussed in the agreement is one of the most common ways to repay.
Final Words
If you want seamless SBLC monetisation, you must do thorough research before picking the monetisation partner. Choosing the right financial institution is also crucial for avoiding scams and fraud.
