Bank Guarantee (BG) and Letter of Credit (LC) are both financial instruments used in international trade and other business transactions, but they serve different purposes. Here are the key differences between Bank Guarantee and Letter of Credit:
- Purpose:
- Bank Guarantee (BG): A bank guarantee is a commitment issued by a bank on behalf of a customer (the applicant) to fulfill a specific financial obligation to a third party (the beneficiary) in case the applicant fails to meet its contractual obligations. It serves as a form of security for the beneficiary against non-performance or default by the applicant.
- Letter of Credit (LC): A letter of credit is a payment guarantee issued by a bank on behalf of a buyer (the applicant) to the seller (the beneficiary). It ensures that the seller will receive payment for goods or services as long as they comply with the conditions specified in the LC, typically involving the presentation of certain documents.
- Nature of Commitment:
- Bank Guarantee (BG): The bank's commitment is to make a payment to the beneficiary in case the applicant fails to fulfill its obligations. The bank may be required to pay a specified amount or fulfill a specific performance obligation on behalf of the applicant.
- Letter of Credit (LC): The bank's commitment is to make a payment to the seller upon the fulfillment of the conditions outlined in the LC. The payment is triggered by the presentation of compliant documents, ensuring that the seller is paid once they meet the terms of the contract.
- Primary Function:
- Bank Guarantee (BG): The primary function is to provide assurance to the beneficiary that they will receive compensation if the applicant fails to meet its obligations. It is often used in construction projects, trade contracts, and other situations where performance guarantees are required.
- Letter of Credit (LC): The primary function is to facilitate international trade by reducing the risk for both the buyer and the seller. It ensures that the seller receives payment upon complying with the terms specified in the LC.
- Terminology:
- Bank Guarantee (BG): Terms such as "performance bond" or "bid bond" are often associated with different types of bank guarantees. BGs can be on-demand or conditional, depending on the agreement between the parties.
- Letter of Credit (LC): Terms like "irrevocable" or "revocable" are used to describe the nature of the LC. An irrevocable LC, once issued, cannot be amended or canceled without the consent of all parties involved.
In summary, while both Bank Guarantee and Letter of Credit involve a bank's commitment, they serve distinct purposes in facilitating international trade and securing financial transactions. Bank Guarantees focus on ensuring performance or compensation in case of non-performance, while Letters of Credit are primarily payment mechanisms that reduce the risk of non-payment in international transactions.
Top Social Media Groups for Business, Professional Networking, Promotions, Jobs, Spiritual, Marketing, Visa
Click here to join Unlimited Groups
News, Health, Travel, Jobs, Top Trending, Top Viral & Entertainment. Follow Us on Social Media
Telegram: Infimor | Instagram: Infimor | Facebook: Infimor LinkedIn: Infimor | YouTube: Infimor
KK