SBLC & BG: A Brief Introduction for Beginners

Below is an expanded and adapted version of the original Russian text, now presented in American English. The goal is to make it clear and useful for a business audience, especially beginners who want to understand how Standby Letters of Credit (SBLC) and Bank Guarantees (BG) might help secure initial capital for a project. References to official frameworks (e.g., ICC rules) are included where relevant. This text is structured for WordPress Gutenberg in Markdown format.

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Overview

Standby Letters of Credit (SBLC) and Bank Guarantees (BG) are widely used financial instruments. They can help entrepreneurs—especially those without substantial assets—secure capital or credit for new projects. However, accessing legitimate SBLC/BG providers can be challenging, and the process often involves significant fees and thorough documentation. Below, we will delve into key points about costs, proper structuring, and common pitfalls.

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1. Personal Stance: Why SBLC/BG Matters

I firmly believe that an SBLC or BG can be one of the most viable ways to obtain initial capital for a new business or project, especially when the entrepreneur does not have hard assets to pledge.

• Real Providers Exist, but Are Hard to Find
  While there are legitimate providers of SBLC/BG, identifying and reaching them can be difficult due to the numerous intermediaries and questionable offers circulating online.
• Unconditional Initial Costs
  SBLC/BG issuance typically requires certain upfront fees. These may be called administrative costs, transmission costs, issuance costs, processing fees, or initiation fees, and are often proportional to the instrument’s face value.

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2. Utility of SBLC/BG in Raising Capital

Not all SBLCs or BGs can be used to obtain financing. For an SBLC/BG to be effective in structured funding, certain criteria must be met:

1. Full Cash Backing
   The instrument must be 100% cash-backed, meaning the underlying funds or assets are unencumbered, unrestricted, unconditional, and freely available.
2. Irrevocable and Unconditional
   The instrument should be issued in an irrevocable manner so the lender (receiving bank) can confidently extend credit against it.
3. No Objection from Provider
   The provider must explicitly allow the borrower to use the SBLC/BG as collateral for financing.
4. Willingness to Sign Authentic Agreements
   The provider must be ready to sign legitimate, binding agreements (referred to here as “Underlined Agreements”)—not just a Deed of Agreement (DoA).
5. Automatic Extension
   Ideally, the instrument should automatically renew (often called “evergreen”) for a minimum of three years, with an initial maturity of one year and one day.
6. Facilitative Language
   The wording (or “verbiage”) of the instrument, as issued by the provider’s bank, must be acceptable to the borrower’s receiving bank so that credit can be granted against the SBLC/BG.

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3. Why Many Attempts Fail

Despite the potential, many SBLC/BG-based funding efforts fail. Below are common reasons:

• Proliferation of DoA (Deed of Agreement)
  Many deals circulate with just a DoA, which by itself has no real power to compel a bank to issue credit. Some of these documents appear hastily or poorly drafted.
• Provider Not Willing to Sign Real Agreements
  If the provider only insists on a DoA and refuses other legally binding contracts, it raises red flags for any credible lender.
• Hidden Fees and Unanswered Questions
  Brokers or intermediaries may focus solely on their commissions, neglecting to inform the borrower about the full range of upfront or administrative costs.
• Irrevocable Corporate Refund Undertakings (ICRU) That Are Fake
  Many ICRUs offered are fraudulent. They may demand payment outside the jurisdiction of the issuing bank or fail to give any legitimate legal protection to the borrower.
• Partial or Conditional SWIFT Messages
  Common SWIFT message types for SBLC/BG include MT799 (pre-advice) and MT760 (actual issuance). Scenarios in which an MT799 is issued with conditions or an MT760 is never transmitted (or only transmitted with disclaimers) are all too common.
• Process Lacks Risk Mitigation
  If the borrower is paying an initial fee but the overall procedure does not reduce their risk, the deal structure is problematic.

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4. Key Elements of a Proper SBLC/BG Deal

When trying to secure a flawless SBLC/BG or find a legitimate provider, focus on these elements:

4.1 Underlined Agreement

• Foundation of the Deal
  A properly crafted Underlined Agreement is the core legal framework binding both parties. It is more comprehensive than a DoA, allowing the borrower’s bank to extend credit confidently against the instrument.
• DoA Is Not Enough
  A Deed of Agreement can serve as a preliminary document to gauge mutual understanding, but it cannot secure a loan against the instrument.
• No Universal Standard
  There is no single worldwide standard for an Underlined Agreement; it should be tailored to the specific funding purpose and any unique project requirements.
• Consult Experts
  Work only with experienced legal and financial professionals who can help draft or review a proper agreement aligned with recognized international rules (e.g., the ICC’s Uniform Customs and Practice for Documentary Credits, ISP98 for standby letters, and URDG 758 for demand guarantees).

4.2 Explicit “No Objection” Clause

• Provider Endorsement
  The provider must include or sign a formal clause stating they have no objection to the borrower using the SBLC/BG as collateral to secure a loan.
• Participation in the Project
  If the provider also participates in the borrower’s project—effectively using their own funds—this strengthens the basis for the loan and often signals credibility.

4.3 Risk-Sharing Agreement

• Protecting Both Sides
  A key component is an agreement that if the lender decides to draw on the SBLC/BG due to the borrower’s default, the borrower must compensate or replace the cash assets that back the instrument, ensuring the provider’s position is safeguarded.

4.4 Automatic Renewal (Evergreen Clause)

• Minimum Three-Year Renewals
  An SBLC/BG should auto-extend for at least three years to provide sufficient time for the borrower to utilize the initial capital, generate returns, and refinance if necessary.
• Practical Consideration
  Repaying an SBLC/BG within one year and one day, given the high cost, is often impractical unless the project cycle is notably short.

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5. Cost of Funding

Funding through an SBLC or BG can be expensive. Borrowers usually rely on these instruments only for initial seed capital, mezzanine financing, urgent capital needs, or an interim bridge to more permanent funding. Expect costs to include:

1. Upfront Costs
   Administrative, issuance, transmission, processing, or initiation fees.
2. Leasing or Issuance Fee
   Charged by the provider for use of the instrument.
3. Annual Renewal Fee
   If the instrument automatically extends, there is typically a yearly fee.
4. Interest Rates
   The borrower’s receiving bank (the lender) will charge interest if the SBLC/BG is used to secure a loan.
5. Broker or Intermediary Commissions
   If third parties facilitate the transaction, they may charge a commission.
6. Bank Service Charges
   Additional fees related to SWIFT transfers, document verification, and compliance checks.

These costs can be broken down into stages, which is often more manageable for the borrower. However, any payment structure must be clearly detailed in binding documentation, ideally in the Underlined Agreement or a well-drafted addendum.

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6. Upfront Fees

It is inevitable that certain fees must be paid before the instrument is issued—whether categorized as transmission fees, administrative fees, or initiation fees. The critical question is how to mitigate the borrower’s risk when making these payments.

• Irrevocable Corporate Refund Undertaking (ICRU)
  This document should protect the borrower if the SBLC/BG is not delivered as agreed. However, many ICRUs are poorly drafted or outright fraudulent.
• Staged Payment
  A more secure strategy is splitting the upfront fees into multiple tranches, each tied to a specific milestone (e.g., the successful issuance of MT799, then MT760), so that the borrower only pays after verifying each step is completed.

Note: The authenticity and enforceability of any ICRU or similar risk mitigation document is crucial. Always consult legal counsel to confirm the document’s validity in the relevant jurisdiction.

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Additional References

• ICC Publications:
• UCP 600 (Uniform Customs and Practice for Documentary Credits)
• ISP98 (International Standby Practices)
• URDG 758 (Uniform Rules for Demand Guarantees)
• Legal Framework in the United States:
• Uniform Commercial Code (UCC) Article 5 — addresses letters of credit.
• Official Banking Channels:
• Contact internationally recognized banks or reputable law firms with expertise in trade finance.

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Conclusion

SBLCs and BGs can be powerful tools for raising initial project capital, but only when handled properly. A legitimate provider, a sound Underlined Agreement, proper SWIFT messaging, transparent fees, and robust risk mitigation steps are essential. Avoid deals relying solely on a DoA or questionable documentation, especially if the provider is reluctant to sign more detailed binding agreements. By carefully evaluating all contracts, costs, and renewal clauses, entrepreneurs can use these instruments effectively, while minimizing risk and maximizing the potential for successful project funding.