Question

Using your language, 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 Bank Guarantee is like a Letter of credit in terms that they both have confidence in the transaction and the parties who are participating. While, the difference is that Letters of Credit ensure that a transaction goes ahead, whereas a Bank Guarantee reduces any loss incurred if the transaction do not go according to the plan.
• A Bank Guarantee guarantees a buyer's payment to a seller or a borrower's payment to a lender for the whole amount that will be received on time. A letter of credit represents an obligation taken on by a bank to make a payment once some of the conditions are met.
• A letter of credit is an obligation taken on by a bank to make a payment once some of the conditions are met. A bank guarantee, like a line of credit, guarantees a particular amount of money to a beneficiary and the amount is only paid if the opposing party does not fulfill the stipulated obligations under the contract, unlike the line of credit.
• According to the Letter of Credit, once the obligation on production of documents on fulfillment of contract is complete, the bank pays amount to the beneficiary. While, in a bank guarantee, the beneficiary is paid on not fulfillment of obligation as per the contract of BG.
• A letter of credit is a written commitment document issued by a bank or any other financial institutions to guarantee payment to seller based on the documentary proof on fulfillment of performance by seller as per terms and conditions mentioned in LC. In an LC, the seller gets guarantee on payment of his sale of goods from the bank of buyer.
• A bank guarantee is a commercial instrument guaranteed by the bank to parties on behalf of his customer, assuring the beneficiary to effect payment on default of obligation.