A company can win a major contract and still face a difficult financing decision before work begins. The customer, project owner or contracting authority may require substantial financial security, but putting that security down as cash could tie up liquidity needed for equipment, materials, mobilisation, payroll and working capital. For a business owners director, managing director or project decision-maker, the question is therefore not simply whether the company can provide security, but whether it should use cash to do so.
A standby letter of credit can potentially provide the required bank-backed security while allowing the company to retain more of its cash for the project and wider operations, subject to the issuing bank’s assessment and terms. Understanding how that works, what it costs and when it makes commercial sense is essential before committing valuable liquidity.
If your company needs an SBLC for a major project or contract, Bear Capital Ventures Limited can assess the requirement and explore an appropriate financing structure around the transaction.
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Discuss your requirements with our specialists and explore a finance structure aligned with your objectives.
The Cash Problem Behind a Major Project
Large projects often create a timing problem.
The company may not receive substantial customer payments until milestones are reached, yet it may need to spend heavily before those milestones occur. At the same time, the counterparty may require financial security before allowing the project to proceed.
Consider a contractor undertaking a £20 million project where the customer requires £3 million of security.
The contractor could potentially provide cash, but doing so would reduce the liquidity available for the actual execution of the project. That £3 million might otherwise support equipment purchases, materials, subcontractors, wages, mobilisation or contingency reserves.
This is the commercial reason an SBLC can become relevant.
Why Use an SBLC Instead of Tying Up Cash?
A standby letter of credit is a bank undertaking that can provide a beneficiary with financial protection if specified conditions for a demand are met.
For the applicant, its potential advantage is that the company may be able to provide acceptable financial security without simply handing the equivalent amount of cash to the beneficiary.
That distinction can have considerable value during a capital-intensive project.
Bear Capital Ventures Limited positions SBLCs as a way for companies to keep cash on the balance sheet rather than tying it up in deposits or prepayments.
That can leave more liquidity available for productive business activity.
What Does the Beneficiary Get?
From the beneficiary’s perspective, the purpose is reassurance.
Rather than relying entirely on the applicant’s promise that it will perform or pay, the beneficiary receives an undertaking from a bank, subject to the wording and conditions of the SBLC.
The quality and acceptability of the issuing institution therefore matter.
A project owner may specify the banks it will accept, the required amount, currency, expiry period, wording or applicable rules. A company should establish those requirements before arranging an instrument.
Bear Capital describes standby letters of credit as instruments that can support obligations including repayment and specified contractual commitments.
Where Can an SBLC Be Useful?
An SBLC can be particularly relevant when substantial financial security is required but the applicant also needs to preserve operating liquidity.
Major construction and infrastructure contracts
Contractors may need performance or payment security before beginning work. The amount involved can be substantial relative to the company’s available working capital.
Large procurement agreements
A buyer or supplier may require security before committing to production, delivery or a significant commercial relationship.
Advance-payment arrangements
Where one party receives money before delivering goods or services, the other party may require financial protection against non-performance.
International contracts
Cross-border transactions can introduce additional counterparty and jurisdictional considerations, making bank-backed security useful in appropriate circumstances.
Enterprise contracts
Large corporations and institutional buyers can impose detailed financial-security requirements on suppliers. Bear Capital Ventures Limited enterprise-contract example demonstrates how SBLCs can be used in significant commercial relationships where preserving balance-sheet liquidity matters.
SBLC or Cash Security: Which Makes More Commercial Sense?
The decision should not be based solely on the headline cost of the instrument.
| Consideration | Cash security | SBLC |
| Provides financial security | Yes | Yes, subject to its terms |
| Preserves company liquidity | No, if cash is immobilised | Potentially |
| Requires bank assessment | Not necessarily | Generally |
| Bank fees | Usually not applicable to the deposit itself | Applicable |
| Underlying obligation remains | Yes | Yes |
| Suitable for every transaction | No | No |
The key question is:
What is the economic value of keeping the cash available?
If retained liquidity allows a company to purchase equipment, fund inventory, meet payroll or avoid expensive short-term borrowing, the value of that liquidity may justify the cost of an SBLC.
An SBLC Is Not Project Finance
This distinction should be understood before entering into any transaction.
An SBLC is primarily a security or credit-support instrument. It does not automatically provide the applicant with project capital.
A company building a £20 million facility may still need project finance to fund construction. It may separately need working-capital finance to support operations and trade finance to purchase imported equipment or materials.
The SBLC may address the security requirement, while other facilities address the funding requirement.
That is why Bear Capital Ventures Limited’s broader financing capabilities can be relevant. Its services include SBLCs and bank guarantees alongside project finance, trade finance and working-capital solutions, allowing the wider transaction to be considered rather than treating every requirement as an isolated product.
What Will the Bank Assess?
Obtaining an SBLC is not simply a matter of requesting a document for a specified amount.
The issuing institution needs to assess the applicant and the transaction. Depending on the circumstances, the process can involve:
- company financial statements;
- management accounts;
- banking information;
- existing borrowing;
- the underlying contract;
- beneficiary details;
- requested amount and currency;
- tenor and expiry;
- proposed SBLC wording;
- project information;
- source of repayment;
- collateral or other security;
- compliance and due diligence.
The exact requirements vary between institutions.
The wording is also critical. SBLCs may operate under recognised rules such as ISP98 or UCP 600, depending on the instrument and transaction structure.
This is one reason a company should obtain and review the beneficiary’s precise requirements before seeking issuance.
What Does an SBLC Cost?
Preserving liquidity does not mean obtaining security at no cost.
Potential costs can include issuance fees, bank charges, amendment fees, confirmation charges where relevant and costs associated with collateral or credit facilities.
But comparing an SBLC with cash security requires a broader calculation.
Imagine that £3 million would otherwise remain unavailable for two years.
What could the company do with that liquidity?
It could potentially finance additional production, purchase machinery, support a larger inventory position, fund project mobilisation or provide a contingency reserve.
The meaningful comparison is therefore not simply:
SBLC fee versus cash deposit.
It is:
Cost of the SBLC versus the commercial value of retaining access to the cash.
The Risk Companies Must Understand
An SBLC does not remove the company’s underlying financial obligation.
If a beneficiary makes a demand that complies with the instrument’s requirements, the issuing bank may be required to make payment. The applicant may then remain liable to reimburse the bank according to the relevant facility or agreement.
SBLCs are generally independent from the underlying commercial contract, which is why their wording and documentary requirements matter so much.
Companies should therefore understand:
- what events can trigger a demand;
- what documents must be presented;
- the expiry date;
- applicable rules;
- governing law;
- the beneficiary’s rights; and
- the company’s obligations to the issuing institution.
This is also why an SBLC should not be treated as a simple cash-equivalent instrument or an automatic route to project funding.
Ready to Secure Financing?
Discuss your requirements with our specialists and explore a finance structure aligned with your objectives.
A Practical Example: Preserving £3 Million of Liquidity
Consider a hypothetical engineering company awarded a £20 million infrastructure contract.
The customer requires £3 million of financial security.
If the company provides £3 million in cash, that capital is no longer readily available for the project.
If the customer accepts an SBLC issued by an appropriate financial institution and the company’s application meets the institution’s requirements, the company may be able to satisfy the security requirement while retaining greater access to its liquidity.
That retained capital could then support:
- equipment;
- materials;
- subcontractor payments;
- staffing;
- mobilisation;
- working capital; or
- project contingencies.
The important point is that the company has not created £3 million of free cash.
It has potentially avoided immobilising £3 million of existing liquidity in the same way as a cash security arrangement.
When Might Another Structure Be Better?
An SBLC is not automatically the best solution.
The beneficiary may require a particular type of guarantee. The issuing bank may not meet the counterparty’s acceptance criteria. The applicant may not satisfy the relevant credit requirements. Alternatively, the cost and complexity of an SBLC may not be justified for a smaller transaction.
A company should also consider whether it needs actual project funding rather than contractual security.
Depending on the transaction, a combination of project finance, working-capital finance, trade finance, bank guarantees and SBLC facilities may make more sense than relying on one instrument.
The correct starting point is therefore the commercial requirement, not the product name.
What Should You Prepare Before Approaching a Financing Provider?
A serious SBLC enquiry should begin with the underlying transaction.
Prepare the contract or tender where available, the required security amount, beneficiary details, proposed tenor, currency, draft wording and project timetable.
Financial information should also be ready, including recent accounts, existing financing arrangements and information showing how the underlying project will generate revenue or support the company’s obligations.
The more clearly the transaction can be presented, the easier it is to determine whether an SBLC is appropriate and what wider financing requirements may need to be addressed.
Bear Capital Ventures Limited and the Wider Financing Requirement
For a major project, the SBLC may only be one part of the financing picture.
Bear Capital Ventures Limited can assess the underlying requirement and explore appropriate structures involving SBLCs, bank guarantees, project finance, trade finance and working capital, depending on the transaction and the requirements of the relevant financing institution.
Where appropriate, financing may involve established banking and financial institutions, subject to their requirements, availability, due diligence and approval.
The objective should be to structure the security and funding around the commercial reality of the project not simply arrange an instrument because it is available.
Before You Commit Your Cash
Before placing substantial cash into security for a major project, calculate what that liquidity needs to accomplish during the same period.
If the company needs that capital for mobilisation, equipment, inventory, suppliers, payroll or contingency, preserving access to it may have genuine strategic value.
An SBLC can potentially provide a way to meet a counterparty’s security requirement while retaining greater liquidity, but whether it is appropriate depends on the project, beneficiary, applicant, issuing institution and transaction structure.
If your company has a specific SBLC requirement, Bear Capital Ventures Limited can assess the transaction and help determine whether an SBLC or a broader financing structure is the more appropriate route.
Before committing millions in cash as security, discuss the requirement with Bear Capital Ventures Limited and assess the structure around the entire project not just the guarantee.
Frequently Asked Questions
Can an SBLC replace a cash deposit?
Potentially, if the beneficiary accepts an SBLC that meets its requirements. The issuing bank must also approve the transaction and its associated terms.
Does an SBLC provide the company with cash?
No. An SBLC is primarily a financial-security instrument. It can potentially help preserve existing liquidity but does not automatically provide project capital.
Can a company use an SBLC alongside project finance?
Yes. An SBLC can potentially address a contractual security requirement while project finance provides capital for eligible project expenditure.
Will a bank always require collateral for an SBLC?
Not necessarily in the same form or amount for every transaction. Requirements depend on the applicant, credit assessment, transaction, issuing institution and other factors.
How quickly can an SBLC be arranged?
Timing varies according to the complexity of the transaction, due diligence, documentation, bank assessment, beneficiary requirements and approval process. A complete application can generally make the process more efficient.
Written by Bear Capital Ventures Limited
Bear Capital Ventures Limited specializes in educational content covering global finance, trade finance solutions, corporate funding, financial instruments, and international capital markets. We provide insights into structured finance solutions, Bank Guarantees, Standby Letters of Credit and business funding strategies for organizations exploring global growth opportunities.
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