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 a Bank Guarantee (BG), Performance Guarantee or Payment Guarantee (PG), or sometimes 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.
Know more about other, non SbLC guarantees | Practical tips
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. Handy CAP guarantee sourcing tips
The “right” choice largely depends on your business needs and how strong you are financially. If your business has revenue and 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, and the stronger their credit rating the better. Download and fill in our pre-approved MS Word Standby LC templates and Email or upload it when you apply for funding (quick form). Need context? Here are the simple steps.
If not, and you do not financial depth, do not give up. Our mission is about 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 (possibly too many) options. This may take some creativity. Keeping above the fray until you’re clear which option(s) will work best is part of why In3 offers free guides to proceed with a brief exploration of this choice between …
- 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.