How Much Does It Cost to Secure a Standby Letter of Credit?

Securing a standby letter of credit, or SBLC, involves considerably more than paying an issuance fee.

An issuing bank assumes a contingent credit exposure when it issues an SBLC. The applicant therefore needs sufficient credit capacity, an approved bank facility, acceptable collateral, cash margin or another form of credit support that satisfies the issuing institution.

Where the applicant does not already have sufficient collateral, the economics become more complex. The company may first need to raise the collateral or liquidity required to support issuance, effectively creating a second financing transaction underneath the SBLC.

For a serious commercial transaction, the cost stack can include SBLC advisory fees, collateral-raising costs, legal counsel, bank underwriting, issuance commissions, security documentation, KYC/KYB, collateral valuation and ongoing facility charges.

The largest economic requirement may ultimately be the collateral itself.

Typical Cost of Securing an SBLC

The following figures illustrate the principal expenses that may arise when arranging a standby letter of credit.

The professional expenses above are only one component of the transaction. A company that does not already possess eligible collateral may need substantially more capital because the collateral itself must first be sourced, financed or raised.

1. SBLC Advisory and Transaction Structuring

Indicative cost: $15,000–$75,000+

An SBLC advisory mandate begins with determining whether the proposed standby structure is commercially and creditably viable.

The advisor may review:

• Required SBLC face value
• Beneficiary requirements
• Proposed tenor
• Underlying commercial obligation
• Applicant financial statements
• Existing banking relationships
• Available collateral
• Liquidity
• Existing debt facilities
• Required SBLC wording
• Applicable drawing conditions
• Issuing-bank requirements
• Proposed reimbursement mechanics

The objective is to determine what credit structure could support issuance.

A financially strong company may already have a bank willing to establish a contingent credit facility.

A weaker applicant may need cash margin, pledged securities, real estate, receivables or other collateral.

An applicant with insufficient collateral may need an entirely separate collateral-raising mandate before the standby can be issued.

2. The Applicant Must Usually Provide a Counter-Indemnity

An important part of SBLC issuance is the counter-indemnity or reimbursement undertaking provided by the applicant to the issuing institution.

When a bank issues a standby letter of credit, it undertakes to pay the beneficiary if a compliant drawing is presented under the instrument.

The applicant therefore undertakes to reimburse the issuing bank for amounts the bank is required to pay.

In practical terms, the structure may look like:

Applicant → Counter-Indemnity → Issuing Bank → SBLC → Beneficiary

The counter-indemnity establishes the applicant's contractual reimbursement obligation to the issuing bank.

Depending on the credit structure, the reimbursement agreement may cover:

• Principal amounts paid under the SBLC
• Interest
• Default interest
• Legal expenses
• Enforcement costs
• Taxes
• Correspondent-bank expenses
• Indemnification obligations
• Foreign-exchange exposure
• Documentary expenses

The bank may also require the applicant to grant security supporting those obligations.

This is why an SBLC should be understood as a bank credit exposure, rather than simply a document that can be purchased for an issuance fee.

3. Collateral Requirements

The collateral requirement is frequently the most important economic component of an SBLC transaction.

An issuing bank may accept different forms of collateral depending on its credit policy.

These may include:

• Cash
• Term deposits
• Marketable securities
• Government securities
• Investment portfolios
• Real estate
• Receivables
• Deposits held under account control
• Corporate assets
• Parent-company guarantees
• Third-party guarantees

The bank applies its own loan-to-value or collateral-advance methodology.

A liquid government security portfolio may receive substantially more favorable treatment than specialized machinery or illiquid real estate.

Certain applicants with strong financial statements and established banking relationships may obtain partially secured or unsecured contingent facilities.

The ability to do so derives from the applicant's credit standing and approved banking capacity.

4. What Happens If You Do Not Have Collateral?

A company without sufficient collateral has to solve the collateral requirement before an issuing bank can assume the exposure.

That may require raising:

Debt capital

A lender provides capital that is subsequently deposited or pledged in support of the SBLC.

Equity capital

Investors provide additional balance-sheet capital in exchange for ownership or another economic interest.

Preferred equity

Capital is raised using an instrument with contractual preference over ordinary shareholders.

Asset-backed financing

Existing assets are refinanced to generate the cash required for the SBLC margin.

Third-party credit support

A qualifying parent, sponsor or other creditworthy party may provide a guarantee or acceptable security.

This creates an important distinction.

A company seeking a $10 million SBLC may first need to raise $2 million, $5 million or even $10 million of eligible collateral, depending on the issuing bank's credit decision.

The collateral raise can therefore be considerably more difficult than arranging the standby itself.

5. Cost of Raising the Collateral

Where collateral has to be raised externally, the applicant should budget for the financing costs associated with that capital.

Assume a bank agrees to issue a $5 million SBLC subject to a 30% cash-margin requirement.

Required collateral:

$5,000,000 × 30% = $1,500,000

If the applicant only has $250,000 available, it still needs to raise:

$1,250,000

That financing may carry:

• Interest
• Origination fees
• Arrangement fees
• Investor returns
• Equity dilution
• Preferred returns
• Exit fees
• Legal expenses
• Security costs

The cost of the SBLC therefore cannot be assessed solely by looking at the bank's issuance commission.

6. Legal Counsel

Indicative cost: $10,000–$40,000+

Legal counsel may represent a significant part of the execution budget.

SBLC transactions can involve several interrelated contracts.

Counsel may review or negotiate:

• Credit facility agreements
• Reimbursement agreements
• Counter-indemnities
• Security agreements
• Deposit-account control agreements
• Pledge agreements
• Guarantees
• Intercreditor arrangements
• Collateral assignments
• Beneficiary-required SBLC wording
• Governing-law provisions
• Drawing conditions
• Expiry mechanics

If collateral is being raised separately, additional financing documentation may be required between the applicant and the collateral provider.

Cross-border structures may also require counsel in several jurisdictions.

7. Security Perfection and Collateral Verification

Where the bank relies on pledged assets, it must establish that its security interest is enforceable.

Depending on the collateral, this can require:

• UCC searches or equivalent registry searches
• Asset appraisals
• Property valuations
• Lien searches
• Securities-account control
• Deposit-account control
• Corporate authorization
• Legal opinions
• Registration of security interests

The bank may apply a haircut to collateral value.

For example, an asset with an appraised value of $5 million may provide considerably less than $5 million of usable collateral capacity after the bank applies its internal advance rate.

8. KYC, KYB and Credit Underwriting

Indicative cost: $2,500–$10,000+

SBLC applicants are subject to institutional compliance and credit underwriting.

The process may include:

• Corporate verification
• UBO analysis
• Source-of-funds review
• Source-of-wealth analysis
• Sanctions screening
• PEP screening
• Adverse-media review
• Financial-statement analysis
• Bank-statement review
• Existing indebtedness
• Tax documentation
• Litigation searches
• Commercial-purpose verification

The underlying transaction is also relevant.

The issuing bank may want to understand why the standby is required, who the beneficiary is, what commercial obligation it supports and what circumstances could cause a drawing.

9. Bank Issuance Commission

The issuing institution normally charges an SBLC commission based on the face value and tenor of the instrument.

Pricing is heavily dependent on credit risk.

A strongly collateralized corporate applicant with an established relationship may receive substantially different pricing from a newly incorporated applicant requiring a bespoke credit facility.

The bank considers factors such as:

• Applicant creditworthiness
• Collateral coverage
• Facility tenor
• SBLC face value
• Beneficiary
• Jurisdiction
• Drawing conditions
• Industry
• Country risk
• Expected utilization
• Existing banking relationship

The issuance commission may be payable quarterly, annually or upfront depending on the facility.

10. SWIFT and Advising Charges

The SBLC itself may be transmitted through the SWIFT network, commonly using an MT760 message.

Additional charges can arise for:

• SWIFT transmission
• Authentication
• Advising
• Correspondent banks
• Amendments
• Extensions
• Cancellation
• Documentary processing

These costs are generally much smaller than the collateral and credit costs associated with the underlying facility.

11. Confirmation and Counter-Guarantee Costs

Certain transactions involve additional banking layers.

A beneficiary may require an SBLC issued or confirmed by a bank acceptable to it.

Alternatively, one bank may provide a counter-guarantee or counter-standby supporting another bank's issuance.

A structure might therefore involve:

Applicant → Bank A → Counter-Standby → Bank B → SBLC → Beneficiary

Each institution assumes a separate exposure and may charge its own fee.

This can materially increase the all-in cost.

Example: $5 Million SBLC With No Existing Collateral

Assume a company requires a $5 million SBLC.

The issuing bank approves the transaction subject to a 30% cash margin.

Required collateral

$5,000,000 × 30% = $1,500,000

Assume the applicant must raise the full $1.5 million.

An indicative execution budget might then include:

If the $1.5 million collateral itself is financed, the borrower must also account for the cost of that capital.

The true economics of obtaining the $5 million SBLC could therefore be materially higher than $180,000.

Counter-Indemnity Exposure Matters

Applicants should also understand the economic consequence of a drawing.

If a beneficiary makes a valid $5 million drawing and the issuing bank honors it, the applicant's reimbursement obligation generally becomes immediately relevant.

The bank may enforce its rights against:

• Cash margin
• Pledged collateral
• Accounts
• Guarantors
• Other secured assets
• The applicant itself

The counter-indemnity therefore creates a real contingent liability for the applicant.

Companies should model the transaction on the assumption that the standby could actually be drawn.

How Much Cash Should You Have Before Pursuing an SBLC?

For an applicant that already possesses acceptable collateral and banking capacity, a professional execution budget of approximately:

$50,000–$150,000+

may be reasonable for larger commercial mandates after taking account of advisory, legal, diligence and bank expenses.

Where collateral must also be raised, the required liquidity can increase dramatically.

For example:

$5 million SBLC at 20% collateral = $1 million collateral requirement

$5 million SBLC at 50% collateral = $2.5 million collateral requirement

$5 million SBLC at 100% collateral = $5 million collateral requirement

The actual collateral percentage is determined by the issuing institution.

The Cheapest SBLC Is Usually Backed by Existing Credit Capacity

The strongest applicants typically approach the market with:

• Audited financial statements
• Meaningful tangible net worth
• Established bank relationships
• Existing credit facilities
• Liquidity
• Eligible collateral
• Predictable cash flows
• A credible commercial purpose
• A beneficiary acceptable to the bank
• Experienced legal counsel

These characteristics reduce the amount of structuring required and improve the applicant's position during bank underwriting.

Be Careful With “No Collateral SBLC” Offers

Companies searching for an SBLC without collateral frequently encounter offers describing instruments as leased SBLCs, rented bank guarantees, monetizable guarantees or instruments available against a small upfront payment.

Commercial parties should subject these proposals to rigorous due diligence.

A legitimate issuing bank evaluates who ultimately bears the reimbursement obligation if the standby is drawn.

The relevant questions are therefore:

Who is the applicant?

Which regulated institution assumes the contingent exposure?

Who indemnifies that institution?

What collateral or approved credit facility supports the exposure?

What happens financially if the beneficiary draws the full amount?

If those questions cannot be answered clearly, the proposed structure warrants additional scrutiny.

Request an SBLC Advisory Quote

Financely provides paid advisory support for qualifying companies seeking standby letters of credit, documentary credits, bank guarantees, credit enhancement and structured bank-instrument solutions.

A mandate may include transaction underwriting, structuring, assessment of collateral requirements, preparation of the credit package, issuing-bank strategy and coordination with relevant financing counterparties.

Applicants that do not currently possess sufficient collateral may also require a separate capital-raising workstream before issuance becomes feasible.

Important Notice

All fees, percentages and transaction examples in this article are illustrative. Actual collateral requirements, issuance commissions, legal costs, advisory fees and credit terms are determined on a transaction-specific basis.

Banks and other financial institutions make their own independent credit, compliance and issuance decisions. SBLC issuance is subject to underwriting, documentation, KYC/KYB, sanctions screening, collateral requirements and applicable banking regulations.

Financely provides advisory and transaction-arranging services and does not guarantee issuance, acceptance, monetization or funding of any standby letter of credit.