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 (SLOC or SbLC). Outside the US, bank’s sometimes prefer a Bank Guarantee (BG), Performance Guarantee or Payment Guarantee (PG), even a Demand Guarantee … these are all effectively the same thing.
Selecting the right type of Standby LC (based on how it is worded, also called “verbiage”) and the source pf it is crucial for your business. Handy 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.
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