Legitimate Uses of Standby Letters of Credit in Business

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By Taimour Zaman, Founder, AltFunds Global
Most people who contact me about standby letters of credit have been pitched some “monetization” scheme. They want to know if they can make guaranteed returns by trading SBLCs or participating in bank programs.
The answer is always no. Those are scams.
But legitimate SBLCs do serve factual business purposes. And understanding these genuine applications can help you spot the difference between useful financial tools and elaborate frauds.
A Standby Letter of Credit (SBLC / SLOC) is a guarantee that a bank makes on behalf of a client, which ensures payment will be made even if the client cannot fulfill the payment. It is a payment of last resort from the bank, and ideally, it is never meant to be used.
Think of an SBLC as insurance. You pay the premium (fees and collateral), hope you never need it, but sleep better knowing it’s there.
The bank essentially says, “If our customer doesn’t pay you, we will.” This guarantee allows business to happen between parties who don’t know or trust each other yet.
A standby letter of credit is often required in international trade to help a business obtain a contract. Since the parties to the contract are not familiar with each other, the letter helps establish the seller’s confidence in the transaction.
Here’s a real-world example: A U.S. manufacturer wants to buy components from a supplier in Vietnam. The Vietnamese company has never worked with this manufacturer before and worries about getting paid.
The manufacturer obtains an SBLC from their bank, which guarantees payment. The Vietnamese supplier sees that a reputable bank backs the deal, gains confidence, and agrees to ship the components.
If the manufacturer pays as agreed, the SBLC expires unused. If they don’t pay, the supplier can claim against the SBLC and get their money from the bank.
This isn’t an investment strategy – it’s risk management that costs money but enables profitable business relationships.
Standby letters of credit support a wide range of transactions, including international trade deals, construction contracts with performance guarantees, and lease or purchase agreements.
Construction projects use SBLCs differently. Instead of guaranteeing payment, they guarantee performance.
A developer hires a contractor to build an office complex. The developer obtains an SBLC from the contractor’s bank, which guarantees project completion. If the contractor abandons the job, the developer can claim the SBLC amount to cover completion costs.
The contractor pays fees and posts collateral for this SBLC, but it allows them to win contracts they might not get otherwise. Property owners feel secure knowing the bank backs the contractor’s promises.
Many commercial landlords require SBLCs instead of large security deposits, especially for newer businesses or international tenants.
A startup wants to lease prime office space, but it has a limited operating history. The landlord typically requires six months’ rent as a security deposit. Instead, the tenant provides an SBLC for the same amount.
The landlord gets payment security from the bank, and the tenant preserves cash flow by posting collateral rather than tying up cash in escrow.
Standby LCs serve as a safety net, activated only if the buyer fails to fulfill payment obligations, making them common in service contracts and construction projects.
Government contracts often require bid bonds and performance bonds. SBLCs can satisfy these requirements.
A technology company bids on a federal IT contract. The government requires a performance guarantee equal to 10% of the contract value. The company provides an SBLC from their bank instead of tying up cash in a bond.
This enables smaller companies to compete for government contracts without requiring massive cash reserves.
SBLCs enable businesses to manage their supply chain relationships, particularly with new vendors or in volatile market conditions.
An electronics retailer wants to stock a new product line but worries about the supplier’s financial stability. They require the supplier to provide an SBLC guaranteeing delivery or refund of advance payments.
This arrangement protects the retailer’s upfront investment while allowing the supplier to secure the business relationship.
In competitive real estate markets, SBLCs can demonstrate financial capacity without tying up cash in escrow.
A real estate investor makes offers on multiple properties simultaneously. Instead of placing large earnest money deposits on each property, they provide SBLCs guaranteeing their ability to close.
This demonstrates the financial capacity of sellers while preserving the investor’s flexibility to deploy capital elsewhere.
Legitimate SBLC applications involve real costs:
These costs only make sense when the business benefit exceeds the expense. Nobody uses SBLCs to “generate returns” because they cost money, not make money.
Real banks thoroughly evaluate SBLC applications:
This process takes weeks, not days, and requires substantial documentation.
Several industries regularly use legitimate SBLCs:
In each case, the SBLC solves a specific business problem rather than generating profits.
Legitimate SBLC uses have these characteristics:
Scam SBLC schemes claim:
If you have a legitimate business need for an SBLC:
A standby letter of credit can also be abbreviated SBLC or SLOC. Purpose: A Standby Letter of Credit is used in international trade and high-value transactions to reduce the risk for the seller/exporter by guaranteeing that they will be paid if the buyer defaults.
Legitimate SBLC providers operate under strict banking regulations. In the U.S., this includes oversight from the Office of the Comptroller of the Currency (OCC), Federal Reserve, and state banking authorities.
These regulations ensure that banks maintain adequate capital to back their SBLC guarantees and follow proper procedures for issuance and management.
Standby letters of credit serve essential purposes in legitimate business transactions. They enable international trade, facilitate construction projects, and help companies win contracts by providing third-party guarantees.
But they’re tools that cost money to provide security and enable business relationships. They’re not investment vehicles that generate returns.
If someone approaches you about SBLC “opportunities” that promise profits, you’re looking at a scam. If you have a legitimate business need for payment or performance guarantees, SBLCs might make sense as part of a comprehensive business strategy.
The difference between legitimate and fraudulent SBLC applications is simple: real uses solve business problems and cost money, while scams promise easy profits that don’t exist.
At AltFunds Global, we help accredited investors understand real financial instruments and avoid the pervasive fraud in the SBLC marketplace.
We don’t arrange SBLCs – that’s what legitimate banks do. We help you understand when these instruments serve genuine business purposes and how to work through proper banking channels.
👉 Want tailored guidance? Schedule your strategy call now.
Taimour Zaman is the Founder of AltFunds Global, specializing in legitimate business finance solutions and helping accredited investors avoid financial fraud.
This article is for educational and informational purposes only. It does not constitute investment advice, a recommendation to purchase or sell any security, or an offer to provide investment advisory services. Standby Letters of Credit involve counterparty risk, bank risk, and substantial costs, and are designed for specific business applications, not investment purposes.
SBLCs do not generate investment returns, and legitimate applications require substantial fees and collateral. Be extremely cautious of any scheme claiming you can “monetize” SBLCs or generate guaranteed profits from SBLC-related programs, as these are typically fraudulent.
All business owners should conduct their own independent due diligence and consult with qualified banking professionals, legal counsel, and financial advisors before entering into any SBLC arrangement. The author and AltFunds Global make no representations or warranties regarding the accuracy, completeness, or timeliness of the information contained herein and disclaim any liability for business decisions made based on this content.
This communication has not been approved by the Swiss Financial Market Supervisory Authority (FINMA) or any other regulatory authority and should not be construed as regulatory guidance. SBLC products and services may not be available in all jurisdictions, and banking regulations may vary by location.
Only work with properly regulated banks and financial institutions for legitimate SBLC needs. Avoid any individual or organization claiming to “broker” or “monetize” SBLCs, as these are typically indicators of fraudulent schemes.
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