SoFi

A standby letter of credit (also known as an SLOC or SBLC) is a legal document, typically used in international trade, that acts as a safety net for a deal. It communicates that a bank will guarantee payment if, for example, their customer fails to send funds to a seller for goods or services provided.

Generally, SOLCs are important when the buyer and seller haven’t been acquainted and haven’t yet established a sense of trust. These documents can help a seller secure a contract with a new client. This is especially helpful when they are competing with larger, more established sellers.

What Is a Standby Letter of Credit?

An SLOC (or SBLC; the terms are used interchangeably) is an irrevocable commitment by an issuing bank that it will make payment to a designated beneficiary if the bank’s client defaults on a deal. To phrase it a bit differently, these commitments ensure the payment of a specific amount if one party does not make good on a business agreement. For example, a seller might ship goods to a buyer, but the buyer fails to pay within a specified number of days. In such cases, the bank will intervene and compensate the seller if certain conditions are met.

However, the conditions can be very specific, and failure to meet them can result in the seller not being compensated. For example, issues with shipping or with the product itself could result in denial of payment.

These letters of credit are common in international trade when buyers and sellers aren’t familiar with one another. When entities from two different countries do a deal, the laws and regulations involved may differ. This can add a layer of uncertainty to whether the deal will go through smoothly. An SLOC can help the seller feel more confident they will be paid.

An SBLC acts as a safety net or insurance policy for the seller. If all goes well with the transaction, they won’t have to make use of it. Only if there are issues with the sale will the SBLC be needed, but that bank guarantee adds a level of confidence.

💡 Quick Tip: Typically, checking accounts don’t earn interest. However, some accounts do, and online banks are more likely than brick-and-mortar banks to offer you the best rates.

How a Standby Letter of Credit Works

Now that you know the meaning of SBLC, here’s how it actually functions.

•   When a buyer and seller are entering into a large contract, an SLOC might be created, especially if the buyer and seller don’t know one another. The buyer might create one to help secure a contract or the seller might ask the buyer to obtain a letter.

•   In either case, the buyer goes to a bank and requests an SLOC.

•   The bank will then perform underwriting to verify the buyer’s creditworthiness.

•   The bank might also ask the buyer for collateral if they have bad credit (this is an example of why bad credit is a big deal). The amount of collateral will depend on a variety of factors, including the level of risk, the size of the deal, and the strength of the business.

•   Once the process is complete, the buyer receives the SLOC.

•   The bank will charge a fee, typically between 1% and 10% of value per year while the contract is in effect.

•   Once the transaction project is complete, the SBLC is no longer valid, and the bank will no longer charge a fee.

However, if the buyer defaults on the agreement for any reason, the seller must provide all documentation listed in the SBLC to the buyer’s bank, informing them that the buyer has not held up their end of the arrangement. The bank will then reimburse the seller and later collect payment from the buyer, plus interest.

A deal can fail to be completed for many reasons, such as bankruptcy, lack of cash flow, or dishonesty on the part of the buyer. If the bank determines the buyer has violated the terms of the SLOC, it will then make payment to the seller.

Recommended: Why Are My Credit Scores Different?

Types of Standby Letters of Credit

There are two types of standby letters of credit: financial SBLCs and performance SBLCs.

Financial SBLC

A financial SBLC guarantees payment for goods or services provided. The SBLC guarantees that the buyer’s bank will pay the seller if the buyer doesn’t pay within the timeframe outlined in the letter. If the bank does need to step in and make payment, it will later collect payment from the buyer, plus interest.

Performance SBLC

A performance SBLC is less common but usually guarantees the completion of a project. In this case, a person or company agrees to complete a project within a specified timeframe. Thus, a performance SBLC would reimburse the party paying for the project if it isn’t completed in time or if the client otherwise feels the project was not completed to satisfaction.

Standby Letter of Credit Example

The most common use of SBLCs is to guarantee payment when a seller ships goods, typically internationally, to a buyer.

•   For instance, a buyer might secure a contract to purchase a large shipment of corn from overseas. The seller, never having done business with the buyer before, might ask the purchaser to obtain an SBLC to ensure they are paid for the shipment. Even if the purchaser has taken steps to build credit, this is a new relationship between the two businesses, and trust hasn’t yet been established.

•   The SBLC indicates that the buyer will remit payment within 30 days of receiving the shipment. Thanks to shipment tracking, the seller can see that the buyer has received the shipment of corn. However, 30 days have passed, and the buyer hasn’t paid.

•   The seller can then go to the buyer’s bank, which issued to SBLC, and provide the necessary documentation about this deal and lack of payment.

•   If the bank agrees that the buyer hasn’t held up their end of the agreement, the bank will then pay the seller for the corn. The bank would then collect payment and additional charges from the buyer.

Recommended: Do Personal Loans Affect Your Credit Score?

Advantages of a Standby Letter of Credit

SLOCs have a few advantages worth noting:

•   Guarantee of payment The main benefit of SLOCs is they guarantee payment for the seller. Even if the buyer can’t pay, the seller can ask the buyer’s bank to reimburse them.

•   Helps buyers land contracts A seller might hesitate to ship goods to a buyer they don’t know and trust, even if credit monitoring reveals they seem like a good bet. There’s still an element of risk. The SLOC can make a seller more confident about doing a deal since they will be more likely to get paid.

Disadvantages of a Standby Letter of Credit

There are disadvantages to SLOCs, too. These include:

•   Increased costs The bank that guarantees the SLOC will charge the buyer a fee for every year the contract is in effect. And if the bank has to pay the seller, they will charge the buyer principal plus interest.

•   Not always a guarantee Although SLOCs guarantee sellers will be paid, there can be many hurdles involved before payment is issued. For example, shipping delays or problems with the product itself can lead to denial of reimbursement.

How to Obtain a Standby Letter of Credit

Obtaining a standby letter of credit is generally the responsibility of the buyer. Their bank will reimburse the seller in the event they don’t pay promptly. The bank will also have to determine how creditworthy the client is and decide if collateral is required. (One of the benefits of good credit can be not having to put up collateral in situations like this one.)

To issue the letter, the buyer might work with either a domestic or international trade division of a bank, depending on the deal’s particulars. At this point, it’s also wise for the buyer to have an attorney on site to review the terms of the agreement.

A seller can ask that the buyer obtain an SLOC as part of the contract. All parties should have legal experts involved to ensure the accuracy and conditions of the agreement.

Recommended: Do Credit Scores Update Often?

The Takeaway

Standby letters of credit (SLOCs) are useful legal documents for both buyers and sellers doing business, especially if they are working on an international deal. These letters can act as a safety net, saying that if a buyer doesn’t complete a deal, their bank will step in and make payment. For sellers, these letters can help increase confidence that they will be paid for goods or services. For buyers, they can be helpful in securing new contracts.

Not all banking involves international business deals, however. If you are looking for a reliable bank for your daily personal finance needs, see what SoFi offers.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

What does standby mean in letter of credit?

A letter of credit is a legal document that provides a safety net for a financial deal. “Standby” in this context refers to the fact that these letters are only implemented (and funds then issued) by the bank if the buyer fails to pay. If the buyer pays within the expected timeframe, no action is taken. The letter of credit has stayed on standby status.

What is the difference between a letter of credit and a standby letter of credit?

The difference between a letter of credit and a standby letter of credit is what each of them promises. A letter of credit is a guarantee from a bank that the buyer will pay. On the other hand, a standby letter of credit is a guarantee from the bank that they will pay if the buyer fails to do so.

Can SBLC be used as collateral?

The SBLC itself is not usually considered collateral. However, a bank may require the buyer to provide collateral before issuing an SBLC if the bank feels the buyer’s creditworthiness is not up to par.

Photo credit: iStock/BartekSzewczyk

SoFi Checking and Savings is offered through SoFi Bank, N.A. Member FDIC. The SoFi® Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.

Annual percentage yield (APY) is variable and subject to change at any time. Rates are current as of 11/12/25. There is no minimum balance requirement. Fees may reduce earnings. Additional rates and information can be found at https://www.sofi.com/legal/banking-rate-sheet

Eligible Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Eligible Direct Deposit”) via the Automated Clearing House (“ACH”) Network every 31 calendar days.

Although we do our best to recognize all Eligible Direct Deposits, a small number of employers, payroll providers, benefits providers, or government agencies do not designate payments as direct deposit. To ensure you're earning the APY for account holders with Eligible Direct Deposit, we encourage you to check your APY Details page the day after your Eligible Direct Deposit posts to your SoFi account. If your APY is not showing as the APY for account holders with Eligible Direct Deposit, contact us at 855-456-7634 with the details of your Eligible Direct Deposit. As long as SoFi Bank can validate those details, you will start earning the APY for account holders with Eligible Direct Deposit from the date you contact SoFi for the next 31 calendar days. You will also be eligible for the APY for account holders with Eligible Direct Deposit on future Eligible Direct Deposits, as long as SoFi Bank can validate them.

Deposits that are not from an employer, payroll, or benefits provider or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, Wise, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Eligible Direct Deposit activity. There is no minimum Eligible Direct Deposit amount required to qualify for the stated interest rate. SoFi Bank shall, in its sole discretion, assess each account holder's Eligible Direct Deposit activity to determine the applicability of rates and may request additional documentation for verification of eligibility.

See additional details at https://www.sofi.com/legal/banking-rate-sheet.
*Awards or rankings from NerdWallet are not indicative of future success or results. This award and its ratings are independently determined and awarded by their respective publications.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOBK-Q224-1945743-V1

Investing in wind energy involves putting money into companies or funds focused on some aspect of the wind energy industry. Individuals can invest in the wind energy industry directly by investing in companies that operate wind farms or indirectly by putting money into companies that manufacture wind turbines or components.

Wind energy is one of the cornerstones of the renewable energy industry, providing a cost-effective source of electricity generation. As more attention is paid to the effects of climate change and the need to reduce dependence on fossil fuels, many investors are turning to wind energy investments.

What Are Wind Energy Investments?

Wind energy investments are financial stakes in companies and projects focused on generating electricity through wind power. Wind turbines, sometimes called windmills, harness this power by collecting the energy created by wind and converting it into electricity. Wind energy is often divided into two market segments, distributed wind and utility-scale wind.

💡 Quick Tip: How to manage potential risk factors in a self-directed investment account? Doing your research and employing strategies like dollar-cost averaging and diversification may help mitigate financial risk when trading stocks.

Distributed Wind Market Segment

The distributed wind market is usually made up of smaller-scale projects, where wind turbines are used to generate electricity for homes, businesses, and even entire communities.

Utility-scale Market Segment

Utility-scale wind energy, in contrast, consists of turbines that generate more than 100 kilowatts of energy. The power generated by utility-scale wind projects is added to the electrical grid. Companies involved in utility-scale wind energy draw the most interest from individual investors.

Utility-scale wind energy projects can be land-based, where a group of wind turbines is grouped in a wind farm on land. Offshore wind farms built off the coast are another type of utility-scale wind energy, taking advantage of powerful ocean winds to generate large amounts of energy.

Individuals can invest in the wind energy industry by putting money into companies involved in some portion of the wind energy industry or, more rarely, by investing in specific wind energy projects.

Increased Popularity

Wind energy investments, and other socially responsible investments, have grown in popularity in recent years as the focus on the need for sustainable energy grows. Because they rely on wind power rather than fossil fuels, these investments and projects cut down on emissions and pollution.

Further, wind energy is becoming more common because of declining costs, technological improvements, and government tax incentives. In the United States, wind power supplied more than 20% of all electricity to 12 states as of 2022, and in 2023, U.S. wind generation totaled more than 425,000 gigawatt hours of power.

3 Ways to Invest in Wind Energy

Investors can invest in wind energy by putting money into the stocks and bonds of companies in the wind energy industry. Mutual funds and exchange-traded funds (ETFs) with wind energy or renewable energy-focused strategies are also potential investment vehicles for those interested in adding wind energy to their portfolio.

Regardless of the type of investment, investors need to remember that many companies and funds are diversified, meaning that they may be involved in sectors other than wind energy . For investors that want to invest in purely wind energy companies or funds, it’s essential to do research into potential investments.

💡 Quick Tip: How do you decide if a certain trading platform or app is right for you? Ideally, the investment platform you choose offers the features that you need for your investment goals or strategy, e.g., an easy-to-use interface, data analysis, educational tools.

1. Stocks

Investors can put money into various publicly-traded companies involved in some aspect of the wind energy industry. These companies may include wind farm operators, which own and operate wind turbines to produce energy for customers and end-users, and manufacturers of turbines and other components of wind farms. Some utility companies may also be an option for wind energy investors.

Some companies involved in the wind energy industry include:

•   Orsted : The Denmark-based power company is the largest developer of offshore wind power in the world.

•   Vestas Wind Systems : The Denmark-based company is one of the world’s largest manufacturers of wind turbines

•   GE Vernova : The US-based company that was spun-off from GE’s main business in 2024, specializing in energy equipment manufacturing.

•   NextEra Energy : The American energy company has 119 wind farms in operation

•   Alliant Energy : The American energy company owns and operates wind farms across Wisconsin and Iowa

2. Mutual Funds and ETFs

Investors who don’t want to pick individual stocks to invest in can always look to mutual funds and exchange-traded funds (ETFs) that provide exposure to wind energy companies and investments. A growing number of index funds invest in a basket of companies involved in the wind energy industry.

These funds allow investors to diversify their holdings by investing in one security. However, not all wind energy funds follow the same criteria and may focus on different aspects of wind energy. These funds may also have holdings in traditional energy and utility companies that only are partially involved in the wind energy industry.

3. Bonds

The bonds of corporations involved in wind energy business practices can be a good option for investors interested in fixed-income securities. Green and climate bonds are bonds issued by companies to finance various environmentally-friendly projects and business operations.

Additionally, government bonds used to fund wind energy projects can be an option for fixed-income investors. These bonds may come with tax incentives, making them a more attractive investment than traditional bonds.

💡 Recommended: How to Buy Bonds: A Guide for Beginners

Benefits and Risks of Investing in Wind Energy

The trend of investing in renewable energy sources like wind energy is rising as the public becomes more aware of the environmental and economic benefits of doing so. However, before investing in this sector, there are benefits and risks to consider.

Benefits

A benefit of investing in wind energy is that it is a renewable resource, so it will never run out as long as the sun shines and the wind blows. Additionally, wind energy is cost-effective, and tends to be one of the lowest-priced energy sources. And because the power generated from wind farms is sold at a fixed price over a long period of time, it may provide reliable returns for investors — though there are no guarantees.

Wind power is also a clean energy source, meaning it does not produce emissions that can harm the environment like fossil fuels and power plants. This can be attractive for investors focused on building a portfolio of green investments.

Risks

One primary risk of investing in wind energy is that it is a relatively new technology, so there is little data available on its long-term performance. Wind energy and all renewable energy sources must compete with traditional energy sources like oil, coal, and natural gas. Because of this, the long-term outlook for wind energy investments may change. Wind energy investments may be harder to stomach for investors who are not comfortable with the risk of newer technologies.

Additionally, wind energy projects may get pushback from communities where companies want to operate.

How to Build a Wind Energy Portfolio

If you are ready to start investing and want to build a portfolio of wind energy investments, you can follow these steps:

Step 1: Open a brokerage account

You will need to open a brokerage account and deposit money into it. Once your account is funded, you can buy and sell stocks and other securities.

Step 2: Pick your assets

Decide what type of investment you want to make, whether in a company’s stock, a wind energy-focused ETF or mutual fund, or bonds.

Step 3: Do your research

It’s important to research the different companies and funds and find a diversified selection that fits your desires and priorities.

Step 4: Invest

Once you’re ready, make your investment and then monitor your portfolio to ensure that the assets in your portfolio have a positive social and financial impact.

It is important to remember that you should diversify your portfolio by investing in various asset classes. Diversification may help to reduce your risk and maximize your returns.

The Takeaway

Wind energy is a renewable resource that is becoming increasingly popular and is expected to grow significantly in the coming years. This makes it a potential growth investment for those looking to diversify their portfolios and reduce their reliance on traditional energy sources.

While the outlook for wind energy is promising, investments in wind energy may not always produce positive returns. When considering a wind energy investment, it is important to do your research and understand the risks and rewards involved with this nascent industry.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Photo credit: iStock/XtockImages