A standby letter of credit is basically a guarantee made by a bank on behalf of their customer that states if their customer does not pay the beneficiary or the loan holder that the bank will pay them. These types of letters of credit are a great way for a business or corporation to get paid their money regardless of the circumstances. Most standby letters of credit state that the bank will pay the beneficiary regardless of any disputes that may be going on. The following is a list of some of the parties that are usually involved in SBLC Financing and what role each of them plays.
The Applicant
The applicant is the customer of a bank that applies for a standby letter of credit. Usually, they will have to provide sufficient proof of income and collateral before the bank will even consider issuing this line of credit to them. In most cases, there is a substantial fee attached to securing a standby letter of credit, which is how the bank makes their money off a transaction such as this. Generally, there is a rigorous screening process before the bank will award this type of credit to a customer.
Issuing and Confirming Bank
The first type of bank involved in a standby letter of credit is the issuing bank, which is the bank that gives their customer the line of credit. After the standby letter of credit is issued, the confirming bank comes into the picture. The confirming bank is usually involved with the beneficiary or loan holder and is the issuer of the actual money each month. Usually, the beneficiary will pay the confirming bank a fee for providing this service. After the confirming bank pays the beneficiary, they will turn around and recoup their money from the issuing bank.
The Advising Bank
The advising bank is a financial institution that represents the beneficiary or loan holder. In some cases, the advising bank is who accepts the money from the standby line of credit for the beneficiary. This allows the beneficiary the benefit of not having to worry about getting the money and will give them the freedom to sit back and collect. In some cases, the advising bank and confirming bank are the same entity. Usually, this happens due to the convenience it offers the beneficiary and the issuing bank.
