Bank Guarantee Vs. Letter of Credit

As depicted by its name, an assurance offered by a financial institution by standing on behalf of their customers, for payment assurance, in case of a default, is what we call a BG.

Ann LC is basically a financial tool, often issued by a financial institution on the basis of how much credit the buyer is worth. Typically, most individuals are easily confused by the letter of credit and bank guarantee, as they have certain aspects in common. That being said, there is a disparity in how banks view these goods.

An LC, on the other hand, is a legal doc issued by the buyer to the vendor, to assure them of receiving their payment. Ideally the letter would include specific terms that have to be met by both parties.

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Types Of BG

Ideally two types, - a financial guarantee and the other being a performance guarantee. The first one is an assurance to refund the money in the event that the company fails to complete the deal.  The latter, on the other hand, provides for a promise of compensation in the event of an insufficient or delayed performance of the contract.

Types of LC

While there are several types, the major ones include Usance LC, Confirmed LC, Revocable/Irrevocable LC, Sigh LC, Standby LC, and Revolving LC.

Key Differences Between Both the Letters

With a BG, the creditor assumes to be liable for payment when the organization refuses to abide by the agreement.  In the LC, the primary obligation remains with the financial institution to obtain payment from the vendor.

When the payment made is subject to the effective acceptance of the terms and conditions, that's an LC. With a BG, on the other hand, it is made on default with such terms and conditions.

The BG entails of three people – the beneficiary, applicant, and banker. Whereas in the case of LC, there may be more than three, as it also includes vendor and the issuing financial institution.

Guarantee is an agreement issued to the recipient by the bank of the applicant, guaranteeing payment in the event of default, while the Letter of Credit is a payment guarantee provided by the bank of the applicant, subject to certain terms and conditions.

The BG is used for domestic transactions, while the LC is used for transactions between importers and exporters.