Advantages Of Renting An SBLC

It’s a smart move on the part of the purchaser to buy the items from the seller in order to sell them on to another buyer who is waiting in the wings.
What’s Involved In Leasing An SBLC?
Consider yourself to be a factory producing soy milk from soy beans. You have a $150 million order from the neighborhood supermarket, you want to spend $100 million on soy beans from a supplier, and you have $250 million in your bank account.

You might be worried that this order won’t leave you with much left over after other outgoing costs. You can select for a different (safer) option rather than withdrawing the full $100M from your bank account to use as security to get a loan to buy the soy beans.

To demonstrate to your Supplier that you have the money available to buy the soy beans from them, you might present a bank document. This financial instrument will be provided by a third party, who will allow you to lease their collateral for, say, 10% of the cost, reducing your risk to only $10 million instead of $100 million. Leasing a bank instrument makes you a transient lessee for a period of one year, one day.

Typically, bills are generated on a 45, 60, or 90 day schedule. So in theory, you could borrow money from the bank to buy soy beans from the supplier. This would then be delegated to the Supplier as backup in the event that you failed to pay the invoice, which happens frequently in trade finance.

In a trade finance transaction, the supplier will need guarantees in the form of a bank instrument to show that, in the event that an invoice is unpaid, they can call on the instrument and cash it in to get payment. If this is timed properly, the Supplier can settle the $100M (the cost of the soy beans from the Supplier) within the specified timelines and only risk a small amount of their own money while the Purchaser of the soy bean can receive the goods and convert them into soya milk to sell onto the supermarket who in turn pays the $150M that has been pre-agreed.

An SBLC Leasing Example

The supplier receives $100M for the soy beans.

A bank instrument is leased by the buyer for 10% of its face value. Therefore, in this scenario, the cost of leasing is $100M x 10% = $10M.

In the event that the buyer doesn’t pay the $100 million invoice and the supplier continues to furnish the soy beans, the buyer posts the instrument as a “promise to pay.”

Buyer receives delivery of items and turns the soy beans into soy milk.

The buyer then immediately sells the soy milk to the grocer for $150M.

The grocery store pays the $150 million bill right away.

Without having to pay the whole $100M up front, the buyer then takes the $150M, pays the $100M right away, and makes a profit of $40M ($150M less $100M less $10M for the cost of leasing the instrument). The entire acquisition only cost them $10 million, and they made $40 million as a result.

Purchasing An SBLC

There are several benefits and drawbacks to be aware of if you want to purchase an SBLC. The key benefit of purchasing a StandBy Letter of Credit is that once you are the legal owner of the document, you can lease the bank document to a third party. The cost to purchase the bank instrument would start at roughly 30% or more of the face value, therefore it is important to take this into account. Therefore, if you wish to acquire a StandBy Letter of Credit for $100 million, the cost would start at roughly $30 million, and you would need to compare the advantages of buying vs. leasing a bank instrument.

Finding SBLC providers might be challenging. The process of obtaining a financial instrument through the bank can be time-consuming because to the volume of paperwork that must be completed, and many do not market their services. Finding financial solutions will aid in the development of your company. Innovative financial structuring techniques can produce adaptable answers for business expansion.