Documentation Requirements

The application process for an SBLC requires meticulous preparation of specific documents to ensure compliance and facilitate approval. Key documents include:

1. Application Form: Complete the bank's SBLC application, detailing the transaction and beneficiary information.
2. Business Financial Statements: Provide recent financial statements, including balance sheets and income statements, to demonstrate financial health.
3. Trade Contract or Agreement: Submit a copy of the trade agreement or contract necessitating the SBLC, highlighting terms and obligations.
4. Creditworthiness Evidence: Banks may require evidence of creditworthiness, such as credit reports or references from other financial institutions.
5. Collateral Documentation: If collateral is required, provide documentation such as property deeds, stock certificates, or other asset valuations.

Collateral Requirements

Collateral is often necessary to secure an SBLC, especially if the applicant lacks sufficient capital or has a limited credit history. Acceptable collateral types typically include:

• Cash deposits or savings accounts
• Marketable securities (stocks, bonds)
• Real estate properties
• Other liquid assets deemed acceptable by the issuing bank
• Off-take agreements with creditworthy corporations

The value of the collateral must usually exceed the SBLC amount, with banks setting specific loan-to-value (LTV) ratios.

Raising Capital for Collateral

If the required collateral exceeds current capital holdings, businesses must consider raising additional funds. Options include:

• Debt Financing: Secure a loan or issue bonds, leveraging the company's creditworthiness and future cash flows.
• Equity Financing: Raise capital by selling company shares, diluting ownership but not incurring debt.
• Asset Liquidation: Convert non-essential assets into cash to meet collateral requirements without taking on new liabilities.

Alternatives to SBLC

For businesses seeking flexibility or those unable to meet SBLC requirements, alternatives like revolving credit facilities offer a solution.

These facilities provide a pre-approved credit limit, allowing companies to draw funds as needed, repay, and reuse within the agreement period.

This option offers liquidity without the need for a transaction-specific guarantee.