What is a Stand by Letter of Credit (SBLC) ?
In the private placement business, the bad joke is, there are more acronyms than there are closed deals. Though we HAVE heard of several success stories, there are far more terms than you’d think. Since understanding this “lingo” is a key part of conversations in private placement, we thought we’d cover one of the most important terms of all, the “SBLC”.
Until recent years, very few private placement brokers mentioned SBLC’s, or even knew what they were. This was a time where investors pledged cash or bank instruments for their private placement investments, not “fictional” leased assets. In today’s private placement world, SBLC’s are all over the scene, popping up like weeds! Unfortunately, they have become popular in bank instrument leasing programs, and are now associated with this “niche” of the industry. For those who don’t know what a “SBLC” is, let’s start at the beginning by defining its meaning and applications.
By definition, a SBLC (Stand by Letter of Credit) is a document issued by a bank, guaranteeing payment on behalf of a client. This is used as a “payment of last resort” if the client fails to fulfill a contractual commitment with a third party. In all reality, the SBLC is just a piece of paper with a “value” backed by the good credit of the bank, allowing clients use a “conditional collateral” if needed.
The SBLC (Stand by Letter of Credit) is commonly used when two parties enter into a contract calling for one party to arrange a L/C in favor of the other. With any Stand by Letter of Credit, the agreement is the SBLC will NOT be “drawn” unless the owner defaults on the contract. If the beneficiary was to monetize the SBLC without prior agreement, the owner could dispute the contract in court. The truth is, SBLC’s are rare and used MOSTLY in industrial or bulk commodity sales, serving as a “performance bond” of sorts.
Despite what private placement brokers may claim, the SBLC is not used for leasing or investing very often. Just like we explained above, it’s MOSTLY used in bulk, wholesale, and logistical markets. If you are an investor, watch out for the infamous “SBLC leasing scam”. Don’t waste your time “leasing” an SBLC, or having it “fresh cut” from the bank, it will never fund your project or get you into PPP. The fact is, unless you are using it for credit enhancement or proof of temporary collateral, a “leased” SBLC will ALWAYS be useless. In addition, if you are a private placement broker, ALWAYS BEWARE of investors with SBLC’s. This could mean the funds are leased, fraudulent, or a part of a prior deal gone wrong. All in all, the SBLC is legit, but brokers have tried to apply it to a process it isn’t made for.
In summary, though the SBLC is a credible term, it’s ONLY important when private placement investors are in the USA. Since USA banks do NOT offer the MT 760, the SBLC is the only safe way to assign a trader as temporary beneficiary. Remember, do yourself a favor and BEWARE of PPP brokers who use the term “SBLC”. In all reality, incorrect usage of the term should be considered a HUGE RED FLAG and nothing less!
If you want to learn how to spot other”warning signs” in PPP, take a minute and read the article “Top 10 Red Flags for Private Placement“. It will help you identify real opportunities, while providing key tips to keep you sharp in this oh so unique “business”…
InsideTrade LLC Staff
Phone: (949) 444-2111