Financing for your small business isn’t always easy to come by—but it’s important to look down every avenue of opportunity; you might not be aware of one of the most powerful financing tools out there. Standby letters of credit can help your business in tough contractual and financial situations, making people more likely to sign contracts and do business with you.
What is a Standby Letter of Credit?
A standby letter of credit (SLOC) is a guarantee of payment by a bank on behalf of their client. It is a loan of last resort in which the bank fulfills payment obligations by the end of the contract if their client cannot.
The standby letter of credit is never meant to be used, but prevents contracts from going unfulfilled in the event your company closes down, declares bankruptcy, or is unable to pay for goods or services provided. Standby letters of credit help prove a business’ credit quality and repayment abilities.
Types of Standby Letters of Credit
How to Obtain a Standby Letter of Credit
The standby letter of credit process is similar to that of obtaining a commercial loan, with a few key differences.
As with any business loan, you will need to provide proof of your creditworthiness to the bank. However, the SLOC approval process is much quicker, with letters often being issued within a week of all paperwork being submitted.
Unlike traditional loans, the bank will require a standby of letter of credit fee of between 1-10% of the SLOC amount before issuing the letter. This fee is usually charged per year that the letter of credit is in effect. If the terms of the contract are fulfilled early, you can cancel the SLOC without incurring additional charges.
Standby letters of credit can help establish trust with your business partners and be a powerful tool to help meet your business goals. Talk with your banker about how you can use a standby letter of credit for your business. For more information, contact a Revere Bank relationship manager at 866-950-5784 or firstname.lastname@example.org.
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