STANDBY LETTERS OF CREDIT INSTEAD OF BANK GUARANTEES

QUESTION

Dear Mr. NGUYEN, (MR. OLD MAN)

HOPE THIS EMAIL FINDS YOU WELL, SAFE, and HEALTH.

I contact you after reading all over your blog at www.mroldman.net about every article especially, related to article “Back to Back LC”, and would like to ask your help to advise under circumstances:

I am a trader, receive DLC MT700 after our 2% PB issuing to Buyer’s Bank, then transfer DLC MT720 after 2% PB from Supplier. However, most Supplier in US refuse and cannot comply such requirement due no PB upfront of DLC MT720 by the US law. In the terms of the SPA, Supplier shall issue PB after receiving our DLC MT720, but it could be in the scenario that Supplier could take no action to issue PB back to us afterward, and also could be no goods delivery in final.

The concerning is we receive MT700, and transfer to Supplier in MT720, it is operative once received from the Buyer.

Nowadays, too many scams and fraud in trading over the world, most Buyer request PB upfront DLC because it shows Supplier is serious, reliable and capable to supply the commodities.

My question is:

1. What kind of financial instrument could be fairly and fully protective for both parties to move forward the business in this case?
2. Could US company issue standby LC instead of PB upfront of our DLC MT720?
3. If yes, what is the difference and risk between the standby LC and PB? (in the worst case to make enforcement)

That’s what I need urgently to know – and ask for your kindness to answer me this doubt as soon as you get my email dear Mr. Nguyen.

With my best wishes of all the best to you and prosperity.

Sincere regards,

Ronald Lai

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ANSWER

Dear Robert,

As you know, U.S banks generally do not issue bank guarantees including performance bonds. Instead of bank guarantees, they issue standby letters of credit (SBLC).

So,

1/ You can request the supplier to provide an SBLC issued by a bank. You may rinsist an SBLC of more than 2% of the transferred LC amount to cover the difference between the original LC amount and  the transferred LC amount.

2/ Of course, a company can issue an SBLC but an SBLC issued by a bank is safer for the beneficiary.

3/ An SBLC is to some extent similar to a guarantee. The risk depends on who is the issuer of the SBLC. As said, an SBLC issued by a bank, especially by a first class bank,  is safer for the beneficiary.

Best regards,

Mr. Old Man

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Dear Mr. Old Man,

Thank you very much for your kindness of replying promptly.

Your suggestion is very valuable for me to think over and discuss with the US supplier.

I do wish by my heart to you and your families in peace, joyful, and healthy all the time.

Thank you again!

With Sincere Regards,

Ronald Lai