Standby Letter of Credit (SBLC): How It Works and Why It Matters

In global trade and project finance, trust is everything. Large transactions, infrastructure projects, and international contracts often require strong financial guarantees to protect all parties involved. One of the most widely used instruments is the Standby Letter of Credit (SBLC).

At Credit Glorious, we support clients worldwide in structuring and issuing SBLCs, ensuring that projects move forward with confidence and compliance.

What Is a Standby Letter of Credit (SBLC)?

A Standby Letter of Credit is a financial guarantee issued by a bank on behalf of a client (the applicant) to assure the beneficiary that payment will be made if the applicant fails to fulfill contractual obligations.

Unlike a regular commercial letter of credit, which is a payment method, the SBLC is a “last resort” guarantee—activated only if the applicant defaults. For this reason, it is often described as a safety net in international trade.

How Does an SBLC Work?

1. Application – The client requests an SBLC from its bank, backed by collateral or credit lines.

2. Issuance – The bank issues the SBLC to the beneficiary’s bank.

3. Obligations – If the applicant performs as agreed, the SBLC remains unused.

4. Default – If obligations are not met, the beneficiary can draw on the SBLC and receive payment.

👉 Example: A construction company bidding for an international infrastructure project may provide an SBLC to guarantee that it will complete the work as contracted. If it fails, the SBLC ensures compensation to the client.

Why Is an SBLC Important?

• Trust in transactions – Builds confidence between international partners.

• Access to global markets – Many tenders and contracts require an SBLC as a condition of participation.

• Risk mitigation – Protects the beneficiary against non-performance or default.

• Flexibility – Can support trade finance, project finance, and private investments.

Global Market Data and Framework

• According to the ICC Trade Register, the flow of documentary trade transactions, including letters of credit, SBLCs, and bank guarantees, exceeded 2.5 trillion USD in 2022

• SBLCs are governed primarily by ISP98 (International Standby Practices) and often by UCP 600, both globally recognized rulebooks issued by the International Chamber of Commerce

• The UCP 600 framework regulates letters of credit in over 175 countries, underpinning more than 1 trillion USD of trade finance annually.

• In 2023, ICC and SWIFT launched the first API standards for guarantees and standby letters of credit, improving transparency and digital interoperability

• Unlike bonds or securities, there is no public market for SBLCs—they are always issued and managed through banks and private counterparties

These facts demonstrate how SBLCs are a cornerstone of international trade, widely standardized yet flexible enough to adapt to global markets.

Types of SBLC

• Performance SBLC – Guarantees the completion of contractual obligations.

• Financial SBLC – Guarantees payment in case of default.

• Bid Bond SBLC – Ensures the applicant will honor a bid if awarded a contract.

SBLC vs Bank Guarantee

While similar, there are distinctions:

• SBLC – Primarily used under U.S. law and international trade rules (ISP98/UCP 600).

• Bank Guarantee – More common in Europe, often used domestically.

Both serve as guarantees, but SBLCs are especially recognized in cross-border trade and project finance.

FAQ: Standby Letter of Credit

What is the main purpose of an SBLC? To guarantee payment if the applicant fails to meet contractual obligations.

How long does it take to issue an SBLC? Typically 2–4 weeks, depending on collateral and bank requirements.

Can SBLCs be used in project finance? Yes. SBLCs are widely used in construction, energy, and infrastructure projects to secure performance and payment obligations.

Is there a market for SBLCs? No. SBLCs are issued and managed privately by banks—there is no public market to buy or sell them.

Conclusion

The Standby Letter of Credit (SBLC) is more than a legal document—it is a pillar of trust in international finance. By providing assurance of payment, it enables companies to enter new markets, win contracts, and secure large-scale projects.

 At Credit Glorious, we specialize in structuring SBLC solutions that empower companies to grow internationally with confidence, security, and clarity.