Most people will never need a financial standby letter of credit unless making a large transaction or when doing business with other companies or other individuals for significant sums of money. Basically a financial standby letter of credit, sometimes called a standby letter of credit or SBLC, is a way to guarantee that all involved will pay invoices, loans or specified costs because a bank is guaranteeing to the third party that financial protection is in place.
For sellers requesting a financial standby letter of credit is sound business sense as it avoids the complication of multiple transactions and complicated many step types of agreements. Everything can be addressed in the financial standby letter of credit, keeping the entire transaction simple and streamlined.
What is a Financial Standby Letter of Credit Used For?
Depending on the type of purchase that you are making a financial standby letter of credit can be used in several different types of large dollar sum transactions. The most common include in real estate transactions, both in business and commercial real estate as well as private purchases, to obtain an increase in credit or on a credit line, and to speed up a transaction by providing a guarantee to all involved rather than going through the more traditional options.
In Lieu of Direct Payment
In situations where one party to an agreement is asking for a down payment or deposit that would tie up the other party’s operating capital or improvement capital, a financial standby letter of credit could be supplied in lieu of the deposit amount.
The seller is satisfied as they have a guarantee that the actual cash will be made available by a third party, the bank or financial institute furnishing the standby letter of credit financial, and the buyer is able to use the money for the deposit without having it sitting idle.
In most cases the bank or financial institute that furnishes the financial standby letter of credit will want to have their guarantee in the form of collateral. In the scenario above the buyer could use a currently owned property as collateral on the financial standby letter of credit, ensuring that all requirements were met by all parties to the agreement.