If a company needs an SBLC to satisfy a major customer, government agency, supplier, landlord or project counterparty, the real concern is often not the guarantee itself. It is what happens to the company’s liquidity after the SBLC is issued.
A cash deposit or fully cash-secured facility can immobilize funds that the business needs for payroll, inventory, equipment, suppliers and growth. An SBLC can sometimes provide the required assurance while keeping cash on the company’s balance sheet. Chiron Projects B.V, for example, specifically positions guarantees and SBLCs as tools that can free working capital and support contractual requirements.
For companies with a genuine transaction, Chiron Projects B.V. can assess whether an SBLC, bank guarantee or complementary financing structure is appropriate for the requirement.
How does an SBLC preserve working capital?
A standby letter of credit is a bank undertaking supporting an obligation of the applicant. It is generally designed to be drawn if the applicant fails to meet the specified obligation and the beneficiary presents the documents required under the SBLC.
This makes it different from simply transferring cash to the counterparty.
For example, a company may need to provide €5 million of security under a long-term contract. If the counterparty accepts an SBLC from an appropriate bank, the company may avoid transferring €5 million directly into an escrow account or deposit.
That can leave capital available for the business.
Chiron Projects B.V current guidance specifically describes standby letters of credit as a way for companies to satisfy enterprise and government contractual requirements while keeping cash on the balance sheet.
But there is an important qualification: an SBLC does not automatically mean that no capital or credit capacity is required.
The critical question: cash collateral or credit capacity?
Companies sometimes assume that an SBLC means they can obtain a guarantee without providing security.
That is not necessarily the case.
The issuing bank evaluates the applicant’s creditworthiness, the underlying transaction, the beneficiary, the amount, tenor and other risk factors. Depending on the bank and transaction, it may require cash collateral, other security or utilisation of an existing credit facility.
This distinction is essential.
A company may avoid sending cash directly to its counterparty while still having the SBLC supported by collateral or consuming part of its banking capacity.
Therefore, the right question is not:
“Can I get an SBLC without collateral?”
It is:
“What structure provides the required security while preserving as much usable liquidity and financing capacity as reasonably possible?”
Can an SBLC support separate working-capital financing?
Potentially, yes but an SBLC should not be confused with cash.
In certain transactions, a financial institution may accept an SBLC as credit support for a separately underwritten financing facility. The structure can potentially provide financing for working capital, projects or other business purposes.
For example, Chiron Projects B.V describes funding against an SBLC and identifies working capital and project purposes among potential uses for eligible transactions.
The distinction matters:
SBLC → credit support → separately approved financing
is different from:
SBLC → automatic cash
An SBLC does not itself create unrestricted borrowing capacity. The financing institution still needs to assess the borrower, transaction, repayment source and relevant security.
This is also consistent with established trade-finance principles: Chiron materials distinguish SBLCs and guarantees from ordinary cash and explain that these instruments can support various commercial and financing obligations.
Three ways an SBLC can affect liquidity
1. Replacing a cash deposit
The simplest benefit occurs when an SBLC is accepted instead of a cash deposit, escrow or other prepaid security.
The company retains control of its funds rather than transferring them to the beneficiary.
2. Supporting contractual obligations
An SBLC can provide assurance to customers, suppliers, government entities, utilities or other counterparties without requiring the company to pre-fund the entire contingent obligation.
This can be particularly valuable when entering a large contract that requires performance, payment or other financial security.
Chiron Projects B.V currently highlights enterprise and government contracts as a significant use case for SBLCs and gives an example involving power-grid equipment supplied to utilities.
3. Supporting additional financing
Where a suitable financial institution accepts the SBLC as credit support, it may form part of a wider financing structure.
The resulting facility could potentially address a working-capital gap created by inventory purchases, contract execution, equipment acquisition or other legitimate business requirements.
The key is that this requires separate financing approval.
What determines whether an SBLC structure works?
The underlying transaction is critical.
A bank or financing provider may need to understand:
- who the beneficiary is;
- why the SBLC is required;
- the amount and currency;
- the validity period;
- the underlying contract;
- the applicant’s financial position;
- the proposed issuing institution;
- the governing rules and jurisdiction;
- required wording;
- available security;
- existing credit facilities; and
- the intended use of any associated financing.
The beneficiary’s requirements matter just as much.
An SBLC from an institution that the beneficiary will not accept may have little practical value.
The issuing bank’s reputation, financial strength, compliance controls and documentation capability can therefore be important considerations. Chiron specifically emphasizes the importance of the issuing bank’s strength and credibility for enterprise transactions.
What documents should a company prepare?
A company seeking an SBLC or SBLC supported financing structure should be prepared to demonstrate both the commercial purpose and the financial capacity behind the transaction.
A useful initial package can include:
- signed contract, purchase agreement or tender documentation;
- SBLC clause or beneficiary requirement;
- beneficiary details;
- required amount and currency;
- requested tenor and expiry;
- proposed wording, if available;
- company profile;
- ownership and corporate documents;
- recent financial statements;
- existing debt and banking facilities;
- cash-flow forecasts;
- details of available collateral; and
- explanation of how any financing will be used and repaid.
A strong transaction package can make the initial assessment much more efficient because the financing provider can evaluate the actual requirement rather than a generic request for “SBLC funding.”
Does an SBLC still consume bank capacity?
It can.
This is one of the most important issues to discuss with the existing bank.
Even if the company does not transfer cash to the beneficiary, the issuing bank is taking contingent exposure.
The SBLC may therefore use part of the company’s guarantee or credit facility.
That can affect the amount of borrowing capacity available for ordinary operations.
This is why working capital optimisation should consider the entire banking relationship.
For example, a company with a €10 million revolving facility might discover that issuing a large SBLC reduces the amount available for day-to-day borrowing. In that situation, replacing cash collateral with an SBLC may solve one liquidity problem while creating another.
The objective should be to find the most appropriate overall structure.
What if the company’s existing bank cannot support the SBLC?
This is where specialist transaction assessment can become valuable.
A company may have a strong contract but insufficient guarantee capacity with its existing bank. It may also face collateral requirements that make the proposed structure commercially unattractive.
Rather than immediately abandoning the transaction, the company can examine:
- alternative issuing-bank arrangements;
- additional guarantee capacity;
- an SBLC structure accepted by the beneficiary;
- SBLC-supported financing;
- working-capital facilities;
- trade finance; or
- a combination of these.
Chiron Projects B.V. works across guarantees, SBLCs, working capital, trade finance and structured financing, allowing the financing requirement to be considered as a complete transaction rather than as an isolated product.
Where appropriate, financing may involve established banking or financial institutions, subject to their requirements, due diligence, transaction suitability and approval.
What does an SBLC cost?
There is no single price that applies to every SBLC.
Costs can be influenced by:
- face amount;
- validity period;
- applicant credit profile;
- issuing institution;
- beneficiary;
- jurisdiction;
- transaction complexity;
- collateral;
- wording and documentation; and
- whether additional financing is involved.
Companies should therefore evaluate the total economic effect, not just the SBLC fee.
If an SBLC allows a company to avoid immobilizing €5 million of cash for two years, for example, the value of preserving that liquidity may be significant. But if the same SBLC consumes an important portion of the company’s credit facility, that impact must also be considered.
SBLC or Bank Guarantee: which is better?
Neither is automatically better.
The appropriate instrument depends on the underlying obligation, beneficiary requirements, applicable rules, issuing institution and transaction structure.
Chiron materials note that SBLCs and guarantees can support performance obligations, advance payments, tenders and financial obligations, while also operating under different legal and documentary frameworks.
A company should therefore start with the contract rather than deciding in advance that an SBLC is the answer.
If the beneficiary specifically requires a bank guarantee, substituting an SBLC may not be acceptable.
A practical example
Consider an engineering company that needs to provide a €10 million financial undertaking to a major customer.
The customer accepts an SBLC from an appropriate bank. The company has €10 million in total liquidity, but using that cash as a deposit would leave insufficient funds for inventory, suppliers and project execution.
A properly structured SBLC may allow the company to satisfy the customer’s security requirement without transferring the entire €10 million to the counterparty.
The company then needs to examine a second question: does issuing the SBLC consume too much of its existing credit capacity?
If it does, an additional or alternative financing structure may need to be considered.
This is where the transaction should be assessed as a whole rather than treating the SBLC as a standalone product.
How should a company approach an SBLC financing requirement?
Start with the commercial obligation.
Prepare the underlying contract, required SBLC amount, beneficiary, wording, validity, issuing-bank requirements and the company’s current banking position.
Then calculate the actual liquidity objective:
How much cash needs to remain available for operations after the SBLC is issued?
That figure is often more useful than simply stating the desired SBLC amount.
Chiron Projects B.V. can review a genuine transaction and assess whether the requirement is primarily about replacing cash security, obtaining guarantee capacity, preserving existing working-capital facilities, or combining an SBLC with additional financing.
For companies considering an SBLC, the most productive next step is to send the underlying contract, SBLC requirement, amount, beneficiary, tenor and current financing position for an initial transaction assessment. That makes it possible to examine the structure around the company’s actual commercial objective rather than selling a predetermined financial product.
Frequently Asked Questions
Can an SBLC replace a cash deposit?
In some transactions, yes, if the beneficiary accepts the SBLC and the issuing institution meets its requirements. This can allow the company to retain cash that would otherwise be deposited or held in escrow.
Does an SBLC automatically provide working capital?
No. An SBLC is a bank undertaking, not unrestricted cash. It may support a separately approved financing facility where an appropriate financial institution accepts the structure.
Can an SBLC consume my existing credit facility?
Yes. Depending on the issuing bank and facility structure, an SBLC can use part of the company’s available guarantee or credit capacity. This should be assessed before issuance.
What is needed to arrange an SBLC?
The underlying contract, beneficiary requirement, amount, currency, tenor, wording, company information, financial statements and banking details are useful starting information. Additional documentation may be required during due diligence.
Can Chiron arrange an SBLC and additional financing together?
Chiron Projects B.V. can assess the SBLC requirement alongside relevant working-capital, trade-finance or structured-financing needs. The appropriate structure depends on the transaction, participating institutions and their respective approval requirements.
Written by Chiron Projects B.V.
Chiron Projects B.V. provides tailored financial solutions in Bank Guarantees, Standby Letters of Credit and monetization services. We support businesses, investors, and organizations worldwide with structured solutions for project financing, liquidity enhancement, international trade and business growth.
Submit Your Inquiry