International trade payments
Standby Letters of Credit (SBLC) and Bank Guarantees in International Trade
SBLCs and bank guarantees are independent bank undertakings to pay the beneficiary if the other party fails to perform, for example by not paying or not delivering. Unlike a documentary credit, an SBLC is drawn only on default, so it is usually combined with open account, advance payment or project contracts.
- Exporter risk
- Risk level 2/5
- Importer risk
- Risk level 2/5
- Cost
- ●●●●○
- Applicable rules
- SBLCs usually incorporate ISP98 or UCP 600, while demand guarantees usually incorporate URDG 758; if no rules are incorporated, the undertaking is governed by the applicable law and bank terms.
How it works
- The parties agree the type of guarantee, amount, validity, applicable rules and the wording.
- The party whose obligation is secured (for example the buyer) applies to its bank for an SBLC or guarantee, with a cash margin or credit line.
- The issuing bank sends the undertaking via SWIFT (usually MT760) to the beneficiary's advising bank.
- The beneficiary checks the authenticity and terms, especially the demand conditions and expiry date.
- The parties perform the contract; if there is no default, the undertaking expires unused.
- If there is a default, the beneficiary submits a demand with a statement of breach and any stipulated documents before expiry.
- The bank checks the demand on its face and pays if it complies, then claims reimbursement from the applicant.
Parties involved
- Applicant (Principal): the party whose obligation is secured.
- Guarantor or issuer: the bank that undertakes to pay on a complying demand.
- Beneficiary: the party protected against default.
- Advising bank: authenticates the undertaking for the beneficiary.
- Counter-guarantor, if any: issues a counter-guarantee so that a local bank can issue the guarantee directly.
Exporter
Advantages
- Can sell on open account while still holding payment security.
- Usually cheaper than opening an L/C for every shipment.
- Simpler paperwork than an L/C because it is only used on default.
Drawbacks
- When the seller issues performance or advance payment guarantees, it may face an unfair call.
- Must monitor expiry closely; a claim after expiry is lost.
Importer
Advantages
- Advance payment and performance guarantees protect a buyer who prepays or buys equipment or projects.
- One SBLC can replace many individual L/Cs, reducing cost and paperwork for regular purchases.
Drawbacks
- Uses bank credit lines throughout the validity.
- Can be called even while a commercial dispute is unresolved, because the guarantee is independent of the contract.
Cost
Guarantee and SBLC fees are usually a percentage of the guaranteed amount per year or per quarter of validity, with a minimum, depending on the applicant's credit standing and collateral. The beneficiary may also pay advising fees and a confirmation fee if it asks a bank in its own country to confirm.
Practice in Vietnam
In Vietnam, bank guarantees are issued under the State Bank of Vietnam's regulations on bank guarantees, and commercial banks routinely offer payment, performance and advance payment guarantees to foreign counterparties. When a foreign buyer sends an SBLC, the exporter should ask its Vietnamese bank to authenticate it via SWIFT and review the demand conditions carefully; be very wary of offers to "lease" or "sell" SBLCs, a well-known fraud pattern. For equipment imports, Vietnamese buyers should require advance payment and warranty guarantees issued by reputable banks.
Common guarantees in trade
| Guarantee type | Protects | Purpose |
|---|---|---|
| Payment guarantee or SBLC | Seller | Secures the buyer's payment on time |
| Advance payment guarantee | Buyer | Secures refund of the advance if the seller does not deliver |
| Performance bond | Buyer | Secures proper performance of the contract by the seller |
| Bid bond | Tendering party | Secures that the bidder signs the contract if awarded |
| Warranty guarantee | Buyer | Secures warranty obligations after delivery |
Frequently asked questions
How does an SBLC differ from a documentary L/C?
A documentary L/C is the primary means of payment, used when the transaction proceeds normally. An SBLC is a backup, drawn only when the applicant fails to perform.
Does the beneficiary have to prove the default in court?
No. An independent undertaking only requires a demand and the stipulated documents; disputes about the underlying contract are resolved separately.
Should we use ISP98 or URDG 758?
ISP98 was designed specifically for standbys and is common with US banks, while URDG 758 is widely used for demand guarantees in Europe, the Middle East and Asia. Agree the choice with both parties' banks.
This content is for general guidance and does not replace legal or banking advice for a specific transaction.
Need advice on delivery terms or documents for a specific shipment?
GLG specialists review your contract, Incoterms and document set before you sign with your trading partner.