Table of Contents
What is Letter of Credit?
A finance agreement is a document given by a bank or financial institution. This payment is to a vendor for goods or services that a client has agreed to acquire. The letter of credit assures the seller that they will be paid even if the buyer does not.
If the buyer fails to make a payment, the seller will be paid by the bank or financial institution that issued the letter of credit. In international commerce operations, letters of credit are frequently utilized.
A letter of credit is a written assurance by a bank that it will pay the holder of the letter a specified sum of money upon the presentation of documents that meet the letter’s requirements.
A commercial invoice, a bill of lading, and an insurance policy are usually necessary. The letter of credit substitutes the bank’s creditworthiness for the buyer’s.
What is Bank Guarantee?
The financial backup plan protects in the event of loan failure. if the borrower is unable to repay the obligation. The lender may seek payment from the bank that granted the guarantee.
This fund provides loans for significant purchases such as real estate or automobiles. Other sorts of debt, such as credit card debt, can also be covered by bank guarantees.
This fund provides loans for significant purchases such as real estate or automobiles. Other sorts of debt, such as credit card debt, can also be covered by bank guarantees.
A bank guarantee is a formal promise made by a bank on behalf of its customer to make payments to a third party up to a certain amount if the consumer fails to do so. A bank guarantee‘s goal is to give security to a third party and limit the risk of loss.
Difference Between Letter of Credit and Bank Guarantee
A letter of credit and a bank guarantee are two types of financial instruments that can be used to provide security while conducting a transaction.
The basic contrast between the two is that a letter of credit is a bank’s pledge to pay the seller of goods or services if the buyer fails to do so, whereas a bank guarantee is a bank’s commitment to refund the buyer if the seller fails to deliver the goods or services as agreed
Comparison Table Between Letter of Credit and Bank Guarantee
| Parameter of Comparison | Letter of Credit | Bank Guarantee |
| Definition | A formal document issued by a financial institution that guarantees the payment of merchandise or services to a seller. | A formal agreement by a bank, on behalf of its customer, to pay a monetary amount to a third party if the customer fails to meet its obligation. |
| Area of use | A letter of credit is a payment assurance instrument. It is commonly utilized in international business dealings. | A bank guarantee is a form of financial institution guarantee. That provides compensation if a borrower fails to repay a debt. |
| Risk | A letter of credit is a mode of financing. Corporations can utilize this to reduce costs. The risk of conducting business with new or unidentified entities. | A bank guarantee is a promise made by a bank to reimburse a customer’s losses if they fail to meet their financial obligations. |
| Who uses them? | The letter of credit is often issued by a bank. The buyer issues the seller a letter of credit. The willing seller can, and subsequently will, use this to obtain funds from the issuer and be paid. | This form of assurance can be beneficial for organizations. They are having problems acquiring traditional finance. |
| The number of parties involved | A letter of credit transaction involves four parties. They are the issuer, the beneficiary, the applicant, and the advising bank. The bank that issues the letter of credit is known as the issuer. | A bank guarantee is a contract between three parties. The customer seeks goods or services from the beneficiary, who will provide the goods or services, and the bank. |