- SBLCs can help companies win large contracts. A financial standby letter of credit gives enterprise buyers, utilities, government agencies, and others confidence that contractual obligations will be met.
- SBLCs help negotiate preferred payment arrangements. Instead of tying up cash in escrows, deposits, or pre-payments, companies can keep cash on the balance sheet.
- The issuing bank matters. With SBLCs, counterparties need confidence in the bank’s financial strength, reputation, compliance controls, and documentation expertise.
Congratulations, you’ve closed that funding round or strategically important public sector or enterprise deal. Or perhaps, it’s not quite done yet because the buyer is requiring proof of financial strength before they award the contract. How can you reassure major corporates, utilities, government agencies, and critical suppliers that you can meet all your contractual obligations?
At times like this, that’s when you want a major bank in your corner. And we don’t mean to supply moral support. With an SBLC, or Standby Letter of Credit, the bank guarantees to counterparties that you will perform as required by the contract. In this article we’ll share more about SBLCs and how our venture-backed clients use them to meet their obligations while keeping the cash on-balance sheet.
Securing large enterprise and government contracts with an SBLC
To illustrate how an SBLC can help you close enterprise deals, let us share a client snapshot. One of our clients provides custom-engineered power grid equipment, power transformers, circuit breakers and other switchgear. Companies like this usually sell to investor-owned utilities, municipal utilities, and rural electric cooperatives. They might also support data centers, hyperscalers, or large industrial customers. In these highly competitive bidding situations, bidders usually must guarantee supply, delivery, installation, and warranty for the equipment. We helped our client provide the necessary assurances and they went on to win multiple contracts. SVB issued approximately 40 SBLCs totaling over $18M. We have also applied this approach across sectors, including securing government contracts in healthcare. Let’s look at how SBLCs give counterparties confidence while allowing the company to keep cash on the balance sheet.
Providing confidence, optimizing cash
Not all Standby Letters of Credit are created equal and the issuing bank matters. For starters, the bank issuing the letter of credit must meet legal and regulatory requirements and maintain robust compliance controls. Likewise, the bank’s reputation, capital, and credit ratings are all important in order to validate their ability to step in and pay any obligations in the event of a default. With a financial Standby Letter of Credit, the bank guarantees that if you don’t perform, they will pay.
SBLC and the bank relationship
Counterparties must have trust in the strength and stability of the issuing bank. For example, First Citizens Bank is a Top 20 U.S. bank by assets, with $236B in assets, and the SVB division has a 40-year+ track record serving innovation economy clients. Neobanks, even if they have a bank charter, may not have the reputation or balance sheet to reassure government or enterprise customers.
To our knowledge, leading non-bank fintech providers do not offer SBLCs. An SBLC would have to be issued by the fintech’s sponsor bank. A few sponsor banks might theoretically meet the minimum requirements, but they do not have a direct relationship with your company. That turns out to be a serious detriment when it comes to creating and monitoring the documentation required by an SBLC. To protect your interests, and your business, you need to be able to rely on the bank’s expertise.
The critical importance of bank expertise
The SBLC does not replace the contracts that you have with counterparties. Those contracts stipulate conditions, performance standards, delivery timelines, beneficiaries, and more. Poorly drafted documentation could raise doubts about what events constitute a default. If a counterparty requests a payout by the bank under the SBLC, you want to ensure that the requirements for documentation are clear, validated, and in sync with the agreement. Ultimately, while the bank is ensuring payment, your company remains financially responsible.
Keeping cash on the balance sheet with an SBLC
If your company posts a cash deposit, that can satisfy the counterparty or beneficiary. But it also raises the possibility that you’ll move liquidity outside the business at the exact moment growth is accelerating. That cash can become operationally inaccessible for months, or even years. It gets tied to a single obligation while the company is simultaneously trying to hire, expand infrastructure, support delivery, and pursue additional opportunities. With an SBLC, you can approach the problem of restricted cash differently and there can be advantages versus using surety bonds, bid bonds, advance payment guarantee, or escrow.
The distinction between SBLC and cash deposit matters more than it may seem at first. Even when cash is securing an obligation tied to the SBLC, keeping those funds within the company’s banking structure is very different from sending the money directly to a customer, landlord, supplier, or escrow account. The cash remains on the balance sheet and is part of the company’s broader treasury and banking relationship. As the business grows, that can create more seamless liquidity and working capital management and better visibility into the company’s overall financial position.
Ramping up after an enterprise contract is signed
An SBLC is a flexible tool that can help your company manage risk. With the bank as a trusted intermediary, it can help you to fast-track transactions, negotiate for more favorable terms, and reduce or eliminate deposits or pre-payments. For high-growth companies successfully winning corporate and government bids, there are three use cases that are particularly relevant.
Avoid prepayments and deposits while expanding facilities
In technology, life sciences, and other industry verticals a larger physical footprint can unlock business growth. That may mean opening new offices, expanding the labs, building out data centers, or acquiring warehouse space. For example, we were able to help a client expand their corporate campus with an SBLC for lease guarantee. The company needed a long-term lease for larger office space with a specialized facility. As the space needed a custom build, the property owner required assurance the client would fulfill the lease. FCB issued an SBLC so our client could satisfy the lease terms while keeping cash on the balance sheet.
Negotiate for better terms in supplier contracts
To provide your services, particularly to deliver on multi-year corporate contracts, you may need to place very large upfront orders with suppliers. You can enhance your credibility with these critical vendors and reassure them that all payment terms and conditions will be met, without draining the cash on your balance sheet. An SBLC also helps you to enforce delivery timelines, which can be essential for you to meet your contractual obligations to your customers. When you take payment risk out of the equation, and the supplier is guaranteed to be paid, that puts you in a stronger bargaining position and can help lower your costs.
Managing global risk
Supply chains are increasingly global and while this can add flexibility and access to new markets, it can expose your company to new risks. Cross-border deals can be subject to non-payment from foreign buyers, increased risks from project delays, or volatile currency rates. A standby letter of credit and other global trade finance services can help to reduce your risk exposure and secure a wide range of agreements. If you are expanding globally, an SBLC can help facilitate leases and help you close other real estate transactions. In addition to SBLCs, the right bank can provide guidance and strategies to help navigate the complexities of international markets. A bank with deep experience in global trade finance can help to streamline the flow of import/export documents and accelerate payments. This is another example of why it can be valuable to have a direct relationship with a top bank that understands your business model, industry vertical, and stage of growth.
Help sustain momentum with a bank guarantee for contracts
Securing and delivering on large, multi-year, contracts with government and corporate buyers is the key to success for many fast-growing companies. A standby letter of credit can help to meet contractual requirements while keeping cash available to invest in the equipment, supplies, and facilities needed to successfully execute. An SBLC builds on the bank relationship and leverages the banks financial strength to help build confidence and remove friction and delay. By removing the obstacles to growth, your company is in a stronger position to reach your next milestone.
How to get started with an SBLC
SVB provides unique advantages by combining our expertise in financial Standby Letters of Credit with deep understanding of what it takes to scale venture-backed companies. Learn more about how Standby Letters of Credit can help your business secure contracts and meet those contractual obligations.
Frequently Asked Questions
How can an SBLC help win government or enterprise contracts?
When you’re bidding for a large enterprise contract, the buyer may want more than a strong proposal. They may need assurance that you can deliver, install, supply, or support the work over the life of the contract. An SBLC gives them that confidence with a bank’s guarantee you will meet the contractual obligations.
Can a standby letter of credit be used as a lease guarantee?
Yes. A standby letter of credit can help satisfy a landlord’s need for assurance if you are planning to lease office space, labs, a data center, warehouse, or other specialized facility. Instead of giving your landlord a cash deposit, the SBLC can support the lease obligation for the buildout, equipment, hiring, or other investments needed to make the expansion productive.
Why does the issuing bank matter for an SBLC?
The issuing bank matters because the counterparty must trust the guarantee. They will look at the bank’s financial strength, reputation, compliance standards, and ability to pay under the terms and conditions of the SBLC.
What is the difference between a bank guarantee vs standby letter of credit?
Clients often use the terms SBLC and bank guarantee interchangeably. However, they are governed by different legal frameworks and may have different requirements for documentation. An experienced trade finance specialist can help to identify the options best suited for your business needs.
