What you need to know about monetizing your banking instrument

This methodology in 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 funds for infrastructure projects around the world. Large financial institutions 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 bank instruments and most people, brokers included, have little or no knowledge about what it takes to successfully monetize a bank instrument.

Misconceptions about banking instruments

It’s not uncommon for many people to think that if they have a banking instrument like a bank’s standby letter of credit (SBLC), they can cash it. 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 fact, there are plenty of people who purchase a standby letter of credit only to be surprised to learn that their newly purchased banking instrument was never designed to be monetized to begin with. Therefore, the bank instrument is considered worthless for its intended purposes.

Purpose of bank 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 it’s important to understand what you’re paying for and what you’re getting to ensure it will work for its intended purpose.

The truth of the matter is that having the money to purchase a bank instrument does not automatically mean that your SBLC can or will be monetized. Also, there are limited service providers that are in the business of monetizing banking instruments.

If the purpose of issuing a bank instrument is to finance a project, it is important to note that all the ‘components’ must be in place. In other words, the SBLC provider, bank issuer, monetizer, and merchant must be in sync with each other to have the best chance of raising funds for project financing.

SBLC Considerations

• service provider

Ideally you know
who will monetize your banking instrument before you buy it. This may not be possible at first if you are using the services of a broker and are handing over an instrument that you already have in your possession. Brokers will tend to request a copy of your instrument first and pass it on to 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 huge impact not only on whether the instrument can be monetized but also on
how much ltv (loan to value) can you anticipate receiving? For example, instruments from, say, the UK would have a much higher credit rating than an instrument from Argentina. The jurisdictions and legal ramifications are not the same and you should know and understand the differences. This will also affect the
cost and acceptability of the banking instrument to third party monetization.

• Drafting of the bank instrument

If possible, request a copy of the DOA which should have a sample of the wording of the SWIFT MT-760 (the actual SBLC) and read it carefully. Pay attention to every word and have it checked by the professionals and the beneficiary before you pay 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 take some extra work up front, it will pay off in the long run. There are two keywords to look for when reviewing “Cash-Backed” text. Most monetizers will not be able to do anything with a bank instrument that is not backed by cash.

• Purchase of an SBLC for a line of credit

If you’re setting up a line of credit with your bank, it will help them if you can show them the text ahead of time. However, showing someone your SBLC text may not be enough to establish a line of credit. Of course, text is the first thing a monetizer will see, but it’s far from the only thing we’ll consider.

monetization of banking instruments; things to consider

There are several things worth considering. For example, when using a bank 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 email companies involved in monetizing bank instruments in hopes of finding someone to give you cash, then this would not be considered a “business plan.” “.

• Other supporting documentation

If you have a strong written business plan for a new company, say in the energy sector, as well as PPAs and purchase agreements in place and need a bank guarantee to secure credit lines, this is most likely a bodes well for the bank.

The key is that you must have your paperwork together and you must have a tangible way to make money from your project or investment. These are the things credit providers look for. Ultimately, the bank must like and believe in your project if they are looking to get you credit against a bank instrument. Anyone can purchase 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 your ultimate goal.

• Your own line of credit

If you go down the path of having a third party lock up 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 others. 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 that you follow 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 seen many service providers walk away from transactions due to difficult and uncooperative customers.

Be prepared to submit a full Corporate Information Sheet (or Biography/Application) about your company and its officers along with a full business plan. In the case of monetizing an instrument, be prepared to submit 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 intend 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 will be assigning the instrument to the monetizer to be monetized. Please note that you may be required 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 establishing your line of credit and/or monetizing your SBLC.