Types of Standby Letter of Credit (SBLC)

• Financial SBLC:

A financial standby letter of credit guarantees payment for agreed goods or services if the buyer fails to pay as specified in the contract. For instance, where a crude oil seller ships cargo on credit terms and the buyer does not settle within the agreed 30 days, the seller may claim the amount due from the issuing bank, which will then recover principal and interest from its customer.

• Performance SBLC:

A performance standby letter of credit guarantees that a project or contractual obligation will be completed within the agreed timeframe. If the bank’s client does not fulfill the project requirements, the bank undertakes to pay the beneficiary a specified amount, often to compensate for delay or to fund a replacement contractor, particularly in time‑bound projects such as construction.

Strategia Finance can facilitate the issuance of all types of SBLCs from banks regulated by the UAE Central Bank as well as GCC and international banks outside the UAE.

Advantages of Bank SBLC:

• Risk Mitigation: it provides a safety net to the beneficiary by reducing the risk associated with financial transactions. It ensures that the other party is financially protected if the other party fails to meet its obligations.
• Enhances Credibility: SBLC demonstrates the applicant’s financial strength and commitment to fulfill its obligations in the transaction contract, this increases its credibility and trustworthiness in the eyes of the beneficiary.
• Increases International Trade: SBLCs are essential in cross-border transactions as they provide assurance to foreign buyers or sellers. They help mitigate risks associated with unfamiliar markets, cultural differences, and potential payment defaults.
• Contractual Protection:: SBLC acts as a legally binding contract, offering protection to both the applicant and the beneficiary. They provide recourse in case of non-compliance or breach of contract.

Selecting the Right SBLC

Selecting an appropriate SBLC provider requires assessing factors such as financial stability, regulatory compliance, cost, and issuance speed to ensure the SBLC is valid, widely accepted, and cost-efficient. Reputable providers include banks regulated by the UAE Central Bank as well as leading global banks—such as HSBC, Barclays, and Deutsche Bank—and specialized financial institutions that adhere to international standards. Here are some tips that will help you decide:

1. Credibility and Reputation

The applicant should ensure that the issuing bank is a rated bank and at the same time acceptable by the beneficiary’s bank, and at the same time there is a direct connection between the issuing and receiving bank. More importantly, the applicant should ensure that the providing party – in case of 3rd party provider, i.e., a provider that is providing the SBLC on behalf of the applicant – has enough fund or credit limit in his account to issue the SBLC.

2. SBLC Type and Text (Verbiage)

The applicant is expected to be aware of the type of SBLC the beneficiary is looking for, he should also make the issuing bank and the 3rd party provider (in case of 3rd party provider) of all details pertaining to the SBLC, including the presentation of the underlying transaction documents (invoice, sales purchase agreement, etc.) to avoid any ambiguity and hence wrong SBLC. The applicant should also ensure that the SBLC’s text that is required by the beneficiary is adhered to by the the issuing bank otherwise the SBLC will not be accepted as every small detail in the text makes a big difference in terms of acceptance, especially when the beneficiary is a government or semi government entity or large supplier.

3. Cost and Terms

As a substantial stake of SBLCs are issued by a 3rd party provider (a company or individual that is providing the SBLC from their accounts on behalf of the applicant), one has pay attention to the cost of issuance. The cost in UAE ranges between 12% to 15%. However in all cases, there should be NO fee advance payment, unless made through an escrow (lawyer office or an authorized Escrow agency.

What you should expect:

1- Simple, flexible, reasonably priced SBLCs for all purposes

2- Genuine and verifiable SBLCs

3- Trusted 3rd party providers

4- Fast issuance, in a few days

5- Minimal collateral and documentations

To apply for a bank instrument, you may fill out the below form: