Author: Jenny Bowler

The term SBLC ‘Lease’ or ‘Leased’Standby Letter of Credit is not factually correct. The correct term for SBLC ‘Lease’ is Collateral Transfer. Financial historians suggest the term ‘Leased’ was taken from a Commercial ‘Leasing’ Contract, as it closely resembles a ‘Leased’ Bank Guarantee contract.

The term ‘Leased’ was then subsequently applied to a ‘Leased’ Standby Letter of Credit. Although incorrect the term has been used for many years and is now part of daily financial communications.

Collateral Transfer 

It is a known fact that banks have been reducing their loan books for years. Thus, today it is so much harder for companies to obtain loans and lines of credit. In Switzerland we are lucky to have one of the market leaders in Collateral Transfer.

Collateral Transfer is the means by which a company seeking credit facilities can obtain a SBLC “Lease.” Two parties, the SBLC Provider and another company, (referred to as the beneficiary), will sign a Collateral Transfer Agreement.

The SBLC Provider agrees to “lease” to the beneficiary, usually for one year, a Standby Letter of Credit. The beneficiary agrees to pay the SBLC Provider a fee for “leasing” the Standby Letter of Credit. This is referred to as the Collateral Transfer Fee.

SBLC Monetisation

The reason Standby Letters of Credit are leased is so that they may be monetised. SBLC Monetisation allows companies to obtain loans and lines of credit. A “Leased” Standby Letter of Credit will have the exact same features as a “Leased” Demand Bank Guarantee.

The verbiage within the format will be exactly the same as a “Leased” Demand Bank Guarantee. This verbiage will be absolutely precise and exact. The “Leased” Standby Letter of Credit will be governed by ICC Uniform Rules for Demand Guarantees, (URDG 758). It will be payable on first demand.

To monetise the Standby Letter of Credit the SBLC Provider will instruct their bank to transmit the instrument to the beneficiary’s bank. The beneficiary’s bank will apply the Standby Letter of Credit to their account.

Once the beneficiary has taken ownership of the Standby Letter of Credit they can apply for credit facilities. They can approach their bank and offer the instrument as security against a loan or line of credit. Such credit facilities are often referred to as Credit Guarantee Facilities. As stated above the Standby Letter of Credit is now a guarantee of payment. The bank therefore will be happy to approve any loan applications.

SBLC Lease or Collateral Transfer is becoming more and more popular. More and more companies are turning to Collateral Transfer to obtain loans and lines of credit. In this post pandemic world banks are cutting back on their lending making it extremely difficult to obtain credit.

SBLC Lease is not a difficult path to tread. In fact it is a lot easier than most companies imagine. If you are a company suffering cash flow problems, SBLC “Lease” or “Leased” Demand Bank Guarantees may be the answer to your problems.

The answer to this question is a categorical no. A Bank Letter of Credit is a financial instrument and Line of Credit is a bank loan facility. All banks, whether here in Geneva, London, New York or Singapore will confirm these two items are completely different.

Bank Letter of Credit

A Bank Letter of Credit or Documentary Letter of Credit is a financial instrument issued by a bank. It is a means of payment and is issued only upon receipt of instructions from a banks’ client.

A Documentary Letter of Credit can be either revocable or irrevocable – revocable is very rarely utilised in today’s world of finance. Irrevocable means not capable of being changed or cancelled without all the party’s agreement.

A Documentary Letter of Credit is one of the mainstays of global trade. Without a Documentary Letter of Credit world trade would not grind to a halt, but would become exceedingly slow.

A Documentary Letter of Credit is defined as a bank’s irrevocable promise to pay the seller/exporter on behalf of the buyer/importer. The bank will only pay if the seller complies with all the terms and conditions of the Documentary Letter of Credit.

How does a Documentary Letter of Credit Work?

Under a Documentary Letter of Credit (DLC), a seller may be paid a specific sum in an agreed currency by a bank. The seller must submit all the required documentation as defined by the terms and conditions contained within the DLC. A DLC is all about documents pertaining to the export of goods.

The issuing/buyers bank will transmit the DLC to the seller’s bank, who will forward a copy to the seller. The seller will then get all the documents together to present to their bank. 

Once all the terms and conditions have been satisfied the bank will pay the seller. The goods will be shipped to the buyer. The seller’s bank will seek reimbursement from the buyer’s bank. The buyers bank in turn will claim the same from the buyer.

The following is an example of the types of documentation required by a DLC,

• Bill of Exchange or Draft
• Airway Bill (if air freight)
• Road Transportation Document (if road freight)
• Bill of lading
• Pro Forma or Commercial Invoice
• Insurance Policy and Certificate
• Certificate of Origin
• Inspection Certificate
• Packing List

Many of these documents will be required to be presented in quadruplicate or triplicate, sometimes even more. This is essentially how a Documentary Letter of Credit works. It is completely different to a Line of Credit.

What is a Line of Credit?

A line of credit is a loan facility offered by a bank to their clients. A line of credit is mainly offered to a bank’s corporate clients. It is seldom offered to individuals or private clients.

There are two types of lines of credit:

The first is a Secure Line of Credit. This is where the bank demands security or collateral from the client in return for a line of credit. Security can take many forms such as charge over floating and fixed assets, a charge on the company’s shares and/or personal guarantees from the directors of the company.

The second is an unsecured Line of Credit. This is where the bank takes no security whatsoever as a company will have an extraordinarily high creditworthiness. However unsecured corporate lines of credit are very rare. 

How is a Line of Credit utilised?

A line of credit is not used to cover a single item loan. Typically, it will cover many facets of the business. If a company is an importer, they may need loans for Documentary Letters of Credit. If they are expanding then loans for factory expansion may be required. 

Essentially a line of credit will allow a company to invest in different parts of the business. It will also allow the lender to see if the borrowings are being spent as per the agreement. It is interesting to note that a line of credit can fund a Documentary Letter of Credit. It is the only time the two will complement each other.

Please read – Important 

Around the world banks are denying businesses of credit facilities, potentially limiting opportunities of expansion. Here at IntaCapital Swiss, we have been successfully offering Collateral Transfer to clients for over a decade. Our globally popular Collateral Transfer Facility utilises “leased” Demand Bank Guarantees…

Demand Bank Guarantees are the only guarantees that can be monetised. Once monetised they can be offered as collateral for lines of credit. Collateral Transfer whilst not new, offers companies access to loans and lines of credit.

If your business is suffering pandemic cash flow problems or finding itself being rejected by banks. Then please contact us today, via our online enquiry form.