What you need to know about monetizing your banking instrument
This methodology at its truest essence dates back to the 1940s, shortly after World War II, when heads of state and banks came together to think of ways in which money could be generated to rebuild Europe, which was completely devastated as a result of the war. This meeting became known as Bretton Woods.
Fast forward to today, the methodology can and is used to raise money for infrastructure projects around the world. Large financial agencies such as the World Bank and the IMF use specialized trade programs that generate enough cash to finance large infrastructure projects.
There is a common misconception about monetizing banking instruments and most people, including brokers, have little or no knowledge of what it takes to successfully monetize a banking instrument.
Misconceptions about banking instruments
It’s not uncommon for many people to think that if they have a banking instrument like a Standby Letter of Credit (SBLC) from a bank, they can cash it out. These people expect the service provider (Monetiser) to automatically give them several million in cash just like that. However, the reality is very different.
In reality, there are many people who buy a standby letter of credit and are later surprised to learn that their newly purchased banking instrument was never designed to be monetized. Therefore, the banking instrument is considered to have no value for its intended purposes.
Purpose of banking instruments
SBLCs issued for monetization or for the purpose of securing lines of credit tend to be specifically worded and must include certain terminology. Not all SBLCs are intended for monetization, so understanding what you pay for and what you get is important to ensure it will work for its intended purpose.
The truth of the matter is that having the money to buy a banking instrument does not automatically mean that your SBLC can or will be monetized. Also, there are limited service providers that are dedicated to monetizing bank instruments.
If the purpose of having a bank instrument issued is for project finance, it is important to note that all the ‘components’ must be in place. In other words, the SBLC provider, bank issuer, monetizer, and merchant need to be in sync with each other to have the best opportunity to raise funds for project finance.
Ideally, you should know who You will monetize your banking instrument before you buy it. To begin with, this may not happen if you are using the services of a broker and you are bringing them an instrument that you already have in your possession. Brokers will tend to order a copy of their instrument first and run it through their Provider to see if it can actually be monetized. You should also understand that not all SBLCs are the same.
Issuance of bank instruments and bank rating
Then pay attention to Where does the Standby Letter of Credit come from? This will have a great impact not only on the possibility of monetizing the instrument, but also on how much LTV (loan to value) can you expect to receive? For example, instruments from, say, the United Kingdom would have a much higher credit rating than an instrument from Argentina. Jurisdictions and legal ramifications are not the same and you need to know and understand the differences. This will also affect cost and acceptability of the banking instrument to Monetize third parties.
Drafting of banking instruments
If possible, request a copy of the DOA which should have a sample wording from the SWIFT MT-760 (the actual SBLC) and read it carefully. Pay attention to every word and have the professionals and the beneficiary review it before paying for it. Check if the banking instrument is suitable for monetization and, if possible, try to find a service provider that will monetize it in advance. While it does involve some extra work up front, it will pay off in the long run. There are two keywords to look for when reviewing the “Cash Backed” text. Most monetizers will not be able to do anything with a bank instrument that is not backed by cash.
Buy an SBLC to get a line of credit
If you are establishing a line of credit with your bank, it will be helpful to them if you can show them the text in advance. However, simply showing someone your SBLC text may not be enough to establish a line of credit. Of course, the text is the first thing a monetizer will look at, but it is far from the only thing we will consider.
Monetization of banking instruments; Things to consider
There are several things worth considering. For example, when using a banking instrument to raise funds for a project, a solid business plan and strong relationships are a good start. In other words, you must have a real project and a professional business plan.
If your entire business plan was to get the Standby Letter of Credit and then send emails to businesses involved in monetizing banking instruments in the hopes of finding someone to give you cash, then this would not be considered a ‘business plan’.
Other supporting documentation
If you have a solid written business plan for a new company in the energy sector, as well as current sales agreements and purchase agreements and you need a bank guarantee to secure credit lines, this is most likely a good omen for the bank.
The key is that you must have all your documents together and you must have a tangible way of making money from your project or investment. These are the things that credit providers look for. Ultimately, the bank must like and believe in your project if you are looking for them to obtain credit against a banking instrument. Anyone can buy an SBLC, but only those who have done the hard work and homework will have a good chance of monetizing the instrument or starting a line of credit if that is their end goal.
Your own line of credit
If you are going down the road of a third party blocking millions of dollars to establish a line of credit for you backed by a bank instrument, be prepared to listen and follow the instructions of the credit provider: they are helping you and not the other . reverse. You are proposing to the investor, not the other way around. It is not uncommon for the project sponsor to believe that theirs is the most important project and that their demands must be met. It doesn’t work that way.
If the provider of the line of credit has established procedures and guidelines to follow, it is recommended to comply with their procedures. One thing is for sure, service providers are in need given the lack of liquidity in the banking world and therefore they can choose who they want to work with. We have witnessed many service providers walking away from transactions due to difficult and uncooperative customers.
Be prepared to submit a complete corporate information sheet (or bio / application) about your company and its officers along with a complete business plan. In the case of monetizing an instrument, be prepared to send the text of your SBLC. Explain how you acquired the banking instrument and why you need to monetize it.
Your exit strategy plan
Go into detail about how you plan to exit this strategy and how you plan to return the instrument at the end of the term. However, in the case of monetizing an instrument, the monetizer will be responsible for returning the instrument at the end of the term. In essence, you are assigning the instrument to the monetizer so that it can be monetized. Please note that you may need to show proof of funds (bank statements, not blocked funds) in many cases. If you follow the instructions and what is required of you, there should be no problem in establishing your credit line and / or monetizing your SBLC.