How is a Standby Letter of Credit Used In Project Financing?

Although some restrictions and conditions apply from one instrument to the next, all standby letters of credit are negotiable bank instruments. This allows the instrument to be rated and valued and exchanged for consideration. In other words, being a bank instrument not unlike a bank guarantee, the standby letter can then be monetized.

The use of this type of LC is almost altogether separate in purpose and issuance than a traditional import LC. Asset holders can leverage their financial holdings by issuing bank instruments for the purpose of making loans and issuing lines of credit for project financing.

How Can It Be Used For Project Financing?

By doing this an asset holder can leverage and monetize the financial assets on account with a bank and thus promote project financing through credit enhancement; a process of providing cash collateral security through bank instruments making loans and lines of credit.

Banks can then allow the financing against bank instruments issued from an asset holder on behalf of a beneficiary, which beneficiary constitutes a lender looking to make loans for an applicant seeking project financing.

The rating of the issuing bank as well as that of the letter of credit itself make up some of the constituents the lending ratios are based on. Other parameters may also include the viability of the project itself, the assets of the project, the assets of the company applicant, and the credit worthiness and financial soundness of the applicants involved.

The beneficiary bank cannot return an instrument before the loan is repaid and lien removed. Like it would be expected of a lender they will go through often exhaustive measures to ensure their risks are minimal, otherwise there will be an unwillingness to stand behind the loan undertaking in the first place.

SBLC is nothing but one type of the bank guarantee that provided by the bank in behalf of the client that is used as “payment of last option” should the client fail to do deal of third parties. Now you know the why we need of that and who are the parties to sblc. There are different type of the letter are like performance depend, counter, financial, irrevocable Standby Letter of Credit and many more type of the letter available.