How Does an SBLC Work? Issuance, Demand and Payment

The six steps

Worked example

A fictional Spanish distributor buys components on 60-day open-account terms from a German manufacturer. The manufacturer wants protection, so the distributor arranges an SBLC for EUR 250,000, valid one year, subject to ISP98. The standby requires a signed demand stating that invoices of a stated amount remain unpaid 15 days after their due date, with copies of the invoices.

For eleven months, the distributor pays on time and the standby is never used. In month twelve, two invoices of EUR 40,000 go unpaid. The manufacturer presents a demand with the required statement and invoice copies before expiry. The bank checks the demand against the standby only — not whether the goods were good — and pays EUR 40,000. The distributor then reimburses its bank under its facility agreement.

What makes a demand compliant

A demand must match the standby's wording, be presented at the right place before expiry, and include every document the standby requires. Common problems are late presentation, a statement that does not use the required wording, amounts above the available balance after reductions, and signatures not matching the standby's requirements. Under ISP98, the bank must give notice of refusal within a reasonable time, generally not more than seven business days. See ISP98 vs UCP 600.

For applicants

Negotiate the demand wording. A standby that pays on a simple demand is easier to draw than one requiring a statement of specific default and supporting documents. Watch automatic extension ('evergreen') clauses and make sure the amount reduces as obligations are paid. See SBLC example wording, SBLC costs and the standby overview.

For beneficiaries: before you rely on a standby

Missing an expiry is the most common way a beneficiary loses the protection of a standby. Unlike a documentary credit, nothing happens for months, so it is easy to forget. Put the dates in your finance calendar the day the standby arrives, and review open invoices against the remaining amount every month.

• Confirm the standby through your own bank, not by email from the applicant.
• Check the expiry covers your last payment due date, plus time to present a demand.
• Make sure you can produce every document the demand needs without the applicant's help.
• Note the place and method of presentation, and whether electronic presentation is accepted.
• Check whether the amount reduces automatically and what balance remains after drawings.
• Ask for confirmation by a bank you trust if the issuing bank or its country is a concern.
• Diary the expiry and any extension notice period so a draw is never missed.

Questions