Introduction to Bank-involved Instruments for Project Funding
A bank’s financial guarantee in the US and other countries is called a Standby Letter of Credit (Standby LC, SLOC or SbLC). Outside the US, bank’s sometimes prefer to issue a Bank Guarantee (BG), Performance Guarantee or Payment Guarantee (PG), or sometimes call this a Demand Guarantee (DG).
Although we prefer a properly worded Standby LC, these other names (BG/PG/DG) are all effectively the same thing to us — a method of securing the completion and delivery of one or more projects per CAP’s funding agreement. Whatever the instrument is called, it must reflect the provisions (the wording used below the document’s title, called “verbiage”) of the type we can use. Download template to check this.
Quick Reference:
- Get Started Now: ACTION STEPS (printable version) of instructions to arrange a Standby LC for CAP funding
- Complete technical banking protocol for SbLC “from inception to project completion” for bankers and sophisticated finance professionals, or view 1-page PDF
- When will In3 agree to meet for mutual KYC? See Safety Checkpoints
Types of Guarantee — select the right type of SbLC for your funding needs
Selecting the right type of Standby LC (based on how it is worded, also called “verbiage”) and the source of it is crucial for your business. The “right” choice largely depends on your business needs and how strong you are financially.
Where can I get an SbLC? Commercial banks and US Credit Unions offer SbLCs, where you ask for it through a simple application process. Most bankers consider the applicant’s financial depth critically important, however they often will accept a strong balance sheet, or assets. Some form of an asset (liquid, semi-liquid or illiquid) will typically be necessary to back the SbLC. Whatever asset the banker is willing to accept will work for us.
What type of SbLC do I want to request? Project finance SbLCs for typically 50-80% of the total required funding (can be in 1-3 tranches) are routinely issued by most banks and credit unions globally. If you are working with a larger bank, CAP funding SbLCs are most often handled in private banking, a part of the business/commercial division of most major banks.
This project finance SbLC is sharply different from commodity trade transactions (import/export), where cash is used to pay the seller once the “standby” conditions are satisfied. By contrast, in practice, a project finance guarantee is mainly to prevent fraud, thus we will have no reason to call or cash it. Bankers more familiar with project finance will appreciate this difference.
Can an SbLC be backed by an asset or is cash necessary? Banks in the US and EU, and some of their bankers, will say they require either a Line of Credit or cash on deposit. Of course, if you had cash available (used as a CAP cash surety deposit), you would not need the bank’s SbLC at all, as cash is more valuable and far (SbLCs are perhaps 1.2x-2x the funding, while cash is 3x-4x), but many bankers working for conservative institutions will say this to play it safe.
Practical tips for sourcing SbLC | Compare SbLCs to other guarantee types | Communicating with bankers
What bank should you use?
If your business has revenue and/or a good credit history with your bank, it’s often better to go with your familiar, local bank for issuing an SbLC, though this is not required. Any licensed bank will do, but when the SbLC applicant uses a bank with a stronger credit rating the resulting instrument has incrementally more value.
In other words, a top global bank (Tier 1 or 2) is not necessary, so whatever bank is cooperative and willing to do the work for the benefits it brings, can be considered.
Without sufficient financial depth (or collateral), best to package your project to show strengths, and also acknowledge remaining risks (a sign of experience) to either attract a sponsor or use one of In3’s premium, “Done For You” (DFY) services. If seeking an SBLC, specifically, know more about that DFY solution.
To do this yourself, start by downloading and filling in your project’s specific requirements (note minimum face value of the SbLC must be at or above US$18 million per tranche) using this pre-approved MS Word Standby LC template and Email or upload it when you apply for funding (quick form). Need context to see where this is heading? See simple steps.
If not, and you do not possess financial depth, do not give up. Our mission is about expanding access to funding, where In3CAP makes full-leverage project financing available for the social and/or environmental impacts they deliver. For companies seeking project finance via In3’s CAP funding, there are many options. This may take some creativity, or a modest investment in more personalized services to help guide the effort.
Keep above the fray until you’re clear which option(s) will work best, which is part of why In3 offers free guides — so you can proceed with a brief exploration of the choices available, in outline form:
- Bringing an asset-backed SbLC for ~35-70% of the budget if you can obtain one through your bank.
- Involve a “sponsor” (non-cash asset owner).
- Tips for sourcing CAP Guarantees (including SbLCs).
- Share this sponsor / guarantor landing page
- Ask In3 for a PowerPoint deck that you can tailor for attracting a sponsor.
- If qualified, which means almost bankable, arrange “Done For You” (DFY) premium services with In3.
Most of our clients have used an SbLC with varying amounts of leverage, though cash surety deposits also preserve owner equity affording even greater leverage. Cash is more efficient, especially when a short-term bridge loan or other short-term liquidity happens to be available. Compare cash to SbLCs
Generally, a 33% cash surety deposit is comparable with a 50% SbLC — similar draw timing and bargaining power for the equity split. Equity splits are arranged case-by-case, with a binding offer made once we complete due diligence, but we never ask for control. Ideally, SbLCs will be in the range of 50-75% of the total funding requested, where 100% financing is fine with adequate Security.
There are two types of SBLCs, Collateralized & Non-Collateralized:
Collateralized: When dealing with most banks, they will ask you to have ~100% collateral to back up their (Standby) Letter of Credit. This means you need to secure the letter credit with assets or cash equivalent to the value of the credit. If they demand cash, there’s a misunderstanding, because if you had cash you would use it directly, as mentioned above, instead of involving them at all.
Be mindful that banks will also charge extra fees for issuing a Standby Letter of Credit, usually between 0.25% and 3% annually (usually lower for renewal), or only ask for a 1-time SWIFT fee, the initial issuing charge. This is often negotiable, but also not a significant influence on returns (usually as unlevered IRR) when you amortize such expenses over the life of the project.
Our Family Office is fine to reimburse this; if you need someone else to cover this cost, we’ll need to discuss.
Non-Collateralized: In some situations, if you don’t have enough collateral, a bank might still issue an unsecured SbLC if they think the transaction is low enough risk, or you or the sponsor are quite creditworthy. Balance Sheet or audited financial statements help make the case.
In case the bank insists on collateral and you don’t have it, you will need to find a third party “sponsor” to provide it. Understanding these aspects now helps avoid any unforeseen complications so funding can be secured without major delays.
Hungry for more SbLC knowledge? Dive deeper with In3CAP Guide to Bank-Issued Financial Guarantees
Back to our Introduction to CAP Security
Ask us or your registered In3 Affiliate if you need assistance.