What Is a Standby Letter of Credit?

An SBLC is a bank-issued promise to pay a beneficiary if the applicant fails to meet contractual obligations. It covers draws on debt service or off-take guarantees but carries no cash drawdown feature for project costs.

SBLC vs. Sponsor Equity

In project finance the sponsor equity line covers feasibility studies, permits, design and construction risk. Lenders treat equity as risk capital on the project’s balance sheet. An SBLC adds comfort that certain payments will be made. It does nothing to fund development or cover cost overruns.

Equity Requirement in Early-Stage Projects

For a greenfield power plant or infrastructure build, sponsors typically provide 15–25% of total capital upfront. That cash meets early spend on engineering, environmental studies and long-lead equipment. An SBLC cannot stand in for that commitment.

Common Misconceptions

• Sponsor believes SBLC replaces their cash equity. SBLC does not provide cash flow.
• Confusion between credit support and capital injection. Credit support only covers calls if obligations fail.
• Thinking SBLC ensures project viability. It protects lenders, but the project still needs real capital to move forward.

Proper Role of an SBLC

• Guarantee scheduled debt service if project revenues fall short.
• Backstop offtake commitments to an agreed volume or revenue level.
• Support performance bonds or operation-and-maintenance obligations.

Final Word

An SBLC can strengthen your security package and reassure lenders. It cannot supply the upfront risk capital you must bring. If you need guidance on equity structuring, debt sizing or credit enhancement, FG Capital Advisors stands ready to assist.