Introduction to Bank-involved Instruments for Project Funding
A bank’s financial guarantee in the US and other countries is called a Standby Letter of Credit (Standby LC, SLOC or SbLC). Outside the US, bank’s sometimes prefer a Bank Guarantee (BG), Performance Guarantee or Payment Guarantee (PG), or sometimes a Demand Guarantee (DG). Although we prefer a properly worded Standby LC, these other names (BG/PG/DG) are all effectively the same thing to us — a method of securing the completion and delivery of one or more projects per CAP’s funding agreement.
Why does this matter? For 100% project funding, even when highly leveraged (since a Standby LC is not cash, and may not even require a pledge of collateral), the client facilitates CAP’s “completion assurance” as security against which we can offer sharp advantages over the traditional route to mid-market project funding.
Know more about other, non SbLC guarantees | Practical tips
Selecting the right type of Standby LC (based on how it is worded, also called “verbiage”) and the source of it is crucial for your business. Handy CAP guarantee sourcing tips
The “right” choice largely depends on your business needs and how strong you are financially. If your business has revenue and a good credit history with your bank, it’s often better to go with your familiar, local bank for issuing an SbLC, though this is not required. Any licensed bank will do, and the stronger their credit rating the better. Download and fill in our pre-approved MS Word Standby LC template and Email or upload it when you apply for funding (quick form). Need context? Here are the simple steps.
If not, and you do not financial depth, do not give up. Our mission is about access to funding, where In3CAP makes full-leverage project financing available for the social and/or environmental impacts they deliver. For companies seeking project finance via In3’s CAP funding, there are many (possibly too many) options. This may take some creativity. Keeping above the fray until you’re clear which option(s) will work best is part of why In3 offers free guides to proceed with a brief exploration of this choice between …
- Bringing an asset-backed SbLC for ~35-70% of the budget if you can obtain one through your bank.
- Involve a “sponsor” (non-cash asset owner). Share this sponsor / guarantor landing page
- If qualified, arrange “Done For You” (DFY) premium services with In3.
Most of our clients have used an SbLC with varying amounts of leverage (generally, above $50m total funding, 33-75% SbLC face value, if you don’t mind selling closer to 50% equity), sometimes combining it with a “senior” loan from a private source to avoid dilution. Cash deposits also preserve owner equity, but we never ask for control. More on “hybrid” options.
Hungry for SbLCs knowledge? In3CAP Guide to Bank-Issued Financial Guarantees
Ask us or your registered In3 Affiliate if you need assistance.
Two types of SBLCs, Collateralized & Non-Collateralized
Collateralized: When dealing with most banks, they will ask you to have ~100% collateral to back up their (Standby) Letter of Credit. This means you need to secure the credit with assets or cash equivalent to the value of the credit. If they demand cash, there’s a misunderstanding, because if you had cash you would use it directly, instead of involving them at all.
Be mindful that banks will also charge extra fees for using the Letter of Credit, usually between 0.25% and 3% annually (usually lower for renewal), or as a 1-time SWIFT fee, an initial issuing charge. This is often negotiable. Think about it over the life of your project.
Our Family Office is fine to reimburse this; if you need someone else to cover this cost, we’ll need to discuss.
Unsecured SBLC
Non-Collateralized SBLC: In some rare situations, if you don’t have enough collateral, a bank might still issue an unsecured LC if they think the transaction is low enough risk, or you or the sponsor are quite creditworthy. Balance Sheet or audited financial statements help make the case.
In case the bank insists on collateral and you don’t have it, you will need to find a third party “sponsor” to provide it. Understanding these aspects now helps avoid any unforeseen complications so funding can be secured.
Back to our Introduction to CAP Security