EmerioBanque

Bank Guarantee vs. Letter of Credit: What's the Difference?

It is often seen that people perceive both the Letter of credit and Bank guarantee through the lens of functionality. They have a preconceived notion that BG and Letter of credit are the tools to facilitate international trade through secure and timely payments. However, this is not an appt assessment as each of the two tools is distinct, and has several differentiating factors. Here, we bring you closer to the difference between both the mediums.

Definition

Letter of credit: A letter of credit is a financial document that is issued by the bank to ensure that the seller will receive the payment in full and on time. Provided the seller complies with his side of the agreement and he (seller) needs to present a documentation proof to certify that he has kept his part of the agreement.

Bank guarantee: A Bank Guarantee is another form of financial instrument which provides the security of the payment to the seller in case the other party defaults in payment.

Boundary, and popularity

Bank Guarantee: It is most commonly used domestically, on the other hand, the LOC is used internationally. Though Letter of Credit is used internationally, in terms of popularity, it falls behind the Bank Guarantee form of financial instrument.

Security and use

A letter of Credit shares the risk of trade activity in terms of payments and receipts equally between both the importer and exporter respectively. However, in the case of Bank Guarantee, the bank favors the importer and makes the transaction on behalf of the buyer party.

Letter of credit is used by merchants across the globe, while the use of Bank Guarantee is prevalent in the real estate arena. Here, a bank guarantee can be formed between a construction company and the cement supplier.

Fundamental difference

It is important to note there is one fundamental difference between the Bank Guarantee and Letter of credit. In the case of BG, the bank makes the payment for said amount only if the third party or the importer fails to make the payment. In LOC, a bank makes payment on behalf of the third party as a part of a natural payment process

Types of Guarantee and Letter of Credit

Bank Guarantee

There are four types of Bank Guarantee, the list of which is mentioned below.

- Performance guarantees
- Tender guarantees
- Payment Guarantee
- Advance payment Guarantee

Letter of credit

There are five types of letter of credit:

- Irrevocable Letter of Credit
- Confirmed Irrevocable Letter of Credit
- Revocable Letter of Credit
- Revolving Letter of Credit
- Unconfirmed Irrevocable Letter of Credit





Other news

Exchange Rates

Currency Buy Sell
EUR USD 1.06 1.10
EUR GBP 0.86 0.89
EUR CHF 1.02 1.06
EUR AUD 1.72 1.70
EUR JPY 116.08 116.56
EUR MYR 4.50 4.77
EUR SGD 1.53 1.57
EUR HKD 8.27 8.53
EUR CAD 1.54 53.84
EUR DKK 9.75 1.55

Most Recent Blogs View All Blogs

13 Jul

Trade Finance & SMEs - Reasons Why SMEs Opt For Trade Finance

Small & medium-sized enterprises ie. SMEs have long been considered one of the key drivers for e...

25 Jun

Things To Consider While Choosing Investment Bank

Are you confused about investment bankers? Do you want to know how to pick the best one for your bus...

24 Jun

Advantages Of Getting Corporate Investment Banking Services

Hiring an investment banker or availing the investment banking & management services brings enor...

Disclaimer

Emerio Banque is an innovative global financial institution incorporated in England and Wales with Legal Entity Identifier 875500DGPPWAFABBK130. Emerio Banque does not offer its products and services to businesses and/or persons registered in the United Kingdom.

No information on this website should be construed as a solicitation, offer, recommendation, and representation of suitability or endorsement of any security, investment or strategy.

Important Notice

Emerio Banque would like to advise its customers to report any suspicions which they may have regarding the identity of any intermediary who promotes products or services offered by us or any intermediary bearing similar names. You should verify with Emerio Banque by calling our Customer Service Number on +44 203 059 7831 or emailing help@emeriobanque.com

Please also be aware of bogus SMS messages and voice message calls or fraudsters who impersonate the staff of Emerio Banque.

We have recently become aware of a number of entities with different names misrepresenting themselves as associates, partners or agents of Emerio Banque.

Please be informed that Emerio Banque is not associated with nor do we have any business connections or dealings with such institutions.

Emerio Banque takes all information regarding suspicious fraudulent activity very seriously. Please immediately inform us at compliance@emeriobanque.com if you suspect or are approached by persons misrepresenting or impersonating Emerio Banque and/or its officials. We will make investigations and will take legal action where necessary.