You may be wondering what the benefits of leasing a bank instrument are or considering other options besides risking your own collateral to secure a line of credit.

The benefits of leasing an SBLC:

• It is very good for trade finance.

• It is good to give the Seller peace of mind in case the Buyer does not pay for the goods received.

• It is a good way for a Buyer to purchase goods to sell to a Buyer who is waiting in the wings and use the proceeds from the sale to pay for the goods purchased from the Seller.

How does leasing an SBLC work?

Let’s say you are a factory that converts soybeans into soymilk. You have an order from the local supermarket worth $150 million, you want to buy $100 million worth of soybeans from a supplier, you have $250 million in your bank account.

You may be concerned that with other outgoing costs, this request could leave you with very little money for other expenses. Instead of taking the entire $100 million out of your bank account to put up as collateral for a loan to buy the soybeans, you can choose another (safer) option.

You can obtain a bank instrument to show your Supplier that you have the financial means ready to buy the soybeans from him. This bank instrument will come from a third-party provider that will allow you to lease your collateral at, say, 10% of cost, so now you’re only spending $10 million instead of risking $100 million. Leasing a bank instrument means that you are a temporary lessee for one year and one day.

Invoices are typically issued on a 45, 60, or 90 day billing cycle. So, in theory, you could buy the Supplier’s soybeans by taking out a bank instrument. This would then be assigned to the provider as a backup in case you don’t pay the bill; this is very common in commercial financing.

In trade finance, the Provider will want collateral through a bank instrument to show that in the event an invoice is not settled, they can claim the instrument and cash it to collect their payment. If this is done at the right time, the Buyer of the soybeans can receive the merchandise, convert it into soymilk to sell to the supermarket, who in turn pays the previously agreed $150 million, and the Supplier, in turn, can settle the $100 million. (the cost of the Supplier’s soybeans) within the stipulated timeframes and risk only very little of their own money.

Example of an SBLC lease:

Supplier sells soybeans for 100 million dollars

The buyer leases a bank instrument at 10% of the nominal value of the instrument. Therefore, the cost of leasing in this case is $100M x 10% = $10M

The buyer presents the instrument as a ‘promise to pay’ in case the buyer defaults on the $100 million invoice and the supplier proceeds to supply the soybeans.

Buyer takes shipment of goods and processes soybeans into soymilk

The buyer then immediately sells the soymilk to the supermarket for $150 million.

Supermarket settles $150M bill immediately

The buyer then takes the $150 million and settles the $100 million immediately and earns a profit of $40 million ($150 million minus $100 million minus $10 million for the cost of leasing the instrument) without having to provide the $100 million up front. The entire transaction essentially cost them $10 million and they managed to make $40 million in the process.

Buy a SBLC

If you’re looking to buy an SBLC, there are some pros and cons to consider. The main advantage of buying a StandBy letter of credit is that you become the official owner of the instrument and, in turn, you can lease the bank instrument to a third party. It is necessary to keep in mind that the price of the bank instrument will not be cheap, since the purchase cost would start at around 30% more than face value. So if you want to buy a StandBy letter of credit for $100 million, the purchase price would start around $30 million, so you’ll need to weigh the benefits of buying a bank lease v.