Question

Using your language, don't use any sites (by your understanding), write about the difference between the letter of credit and letter of guarantee

Word Limit for the assignment:
Upper word limit: 1200 words
Lower word limit: 600 words

Answer 1

• A letter of credit is a document that guarantees the buyer’s payment to the sellers. It is Issued by a bank and ensures the timely and full payment to the seller. If the buyer is unable to make such a payment, the bank covers the full or the remaining amount on behalf of the buyer. A letter of credit is issued against a pledge of securities or cash. Banks typically collect a fee, ie, a percentage of the size/amount of the letter of credit.

Since the nature of international trade includes factors such as distance, different laws in each country and the lack of personal contact during international trade, letters of credit make a reliable payment mechanism. The International Chamber of Commerce Uniform Customs and Practice for Documentary Credits oversees letters of credit used in international transactions.

Parties to a letter of credit

• Applicant (importer) requests the bank to issue the LC
• Issuing bank (importer’s bank which issues the LC [also known as the Opening banker of LC])
• Beneficiary (exporter)

LETTER OF GUARANTEE.

It is a letter issues by the bank to the customer providing the guarantee that it will honour the payments made if not made by its clients. It is just a assurance to the person who is siupplying goods or services to the customer.

To get a letter of guarantee for one of your suppliers, your company must apply to your bank just like any other loan application. If approved, your bank essentially transfers its credit rating to your company, so the supplier company can rely on it for payment. This makes it easier for your company to buy the products and services it needs.

As long as your company is able to cover its expenses, it won’t actually require the bank to pay any of its bills, which is why a letter of guarantee is also known as a “standby loan.” Companies pay an annual fee but no interest for this privilege. The fee is usually a percentage of the total amount guaranteed by the letter.