Why You Can’t Get A Standby Letter of Credit Without Upfront Fee
A Standby Letter of Credit (SBLC) is a financial instrument that is used to provide assurance to a recipient (usually a lender) that the issuer of the
SBLC will fulfill a financial obligation if the applicant fails to do so.
This makes SBLCs an attractive option for businesses that need to secure loans, but are not confident in their ability to repay the loan.
SBLCs are also utilised in domestic and international trade, to facilitate commerce between both parties by providing guarantees on behalf of the applicant.
Obtaining an SBLC usually requires an upfront fee, and it is not possible to get one without paying this fee.
Who Uses Standby Letters of Credit?
SBLCs are commonly used by businesses in a variety of industries, including but not limited to, construction, manufacturing, and import/export.
They are also used by individuals who are seeking loans for large purchases, such as real estate or a business.
Why An Upfront Fee?
An upfront fee is a payment that is required to be made before a service or product is received.
In the case of SBLCs, the upfront fee is a payment made to the bank to cover the cost of issuing the SBLC if the company already has the collateral.
In case the company has no collateral, it will most likely have to invest in raising the funds that will serve as collateral for the SBLC in addition to paying issuing fees once the funds have been deposited with the issuing bank.
These potential expenses include the following:
- Upfront Fee: This is the payment made to the bank for issuing the SBLC, which can range from a few hundred dollars to several thousand dollars, depending on the size of the SBLC and the bank issuing it.
- Collateral Acquisition Costs: If the company lacks collateral, it must invest in acquiring the necessary funds or assets to serve as collateral. These costs can include legal fees, due diligence costs, and any expenses associated with securing the collateral.
- Issuing Fees: Once the funds or assets for collateral have been obtained, there may be additional issuing fees charged by the bank for processing and issuing the SBLC.
- Legal and Administrative Costs: Depending on the complexity of the transaction, legal and administrative costs may be incurred for drafting contracts, conducting legal reviews, and managing the SBLC process.
- Interest Costs: If funds are borrowed to cover collateral requirements, interest expenses on loans or credit lines may accrue until the collateral is in place.
- Consulting or Advisory Fees: Some companies may require the assistance of financial advisors or consultants to navigate the SBLC process, which could result in consulting fees.
- Bank Charges: Banks may impose various charges for services related to the SBLC, such as account maintenance or transaction fees.
- Miscellaneous Expenses: Other expenses may arise during the SBLC issuance process, such as travel costs, notary fees, or courier charges.
It’s important for companies considering SBLCs to carefully evaluate and budget for these potential expenses to ensure a smooth and financially viable transaction.
This fee can range from a few hundred dollars to several hundreds of thousands, depending on the transaction.
Stay away from transactions that are too good to be true; i.e. obtaining SBLCs from ‘’Non-Rated Banks’’, or obtaining SBLCs for a small fee, without credit check, without raising the underlying collateral.
SBLCs are not mail order instruments. Even if you have the funds, the transaction will have to be pre-approved by the bank before they can issue an SBLC.
Most likely, the underlying collateral will have to be blocked for that period.
So, if someone charges you 500,000 USD for a 10,000,000 USD for example, and claims there is no need to raise the collateral, stay away.
SBLCs must always be 100% backed.
They’re either backed because the applicant is in good standing and has a credit facility with the bank (potentially revolving), or because the applicant posted 100% cash collateral.
Why is Collateral Required for an SBLC?
The collateral is required in the event that when the SBLC is called upon, the bank won’t have to use its own liquidity to pay the beneficiary on behalf of the applicant.
Can You Get a Standby Letter of Credit Without an Upfront Fee?
It is not possible to obtain a Standby Letter of Credit without paying an upfront fee.
This is because the upfront fee is a requirement for the bank to issue the SBLC, and without the fee, the bank would not be able to cover the costs associated with issuing the SBLC.
Please note that if the applicant is unable to post collateral to back the SBLC, they should expect to invest anywhere between 5% & 10% of the SBLC amount in order to raise enough capital from a third party investor to serve as collateral for the SBLC.
Raising capital typically will involve preparing offering documents & marketing the opportunity to accredited investors seeking exposure to your transaction type.
What are the Risks of Not Paying the Upfront Fee for a Standby Letter of Credit?
If you do not pay the upfront fee for a Standby Letter of Credit the bank may refuse to issue the SBLC, leaving your suppliers & service providers without the assurance they need in order to transact with you.
In case you’re working through a financial advisory to help you raise collateral, the financial advisor will most likely be unable to successfully structure and market your offering without an upfront retainer fee.
