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What is the difference between the letter of guarantee and the standby letter credit
A letter of guarantee is a document issued by a bank on behalf of a customer who has a contract to purchase goods or sevice from a supplier and promises to meet any financial obligations to the supplier or to pay outstanding balnance if the customer fails to do its financial obligations undr the contract and ones suplier demand.
Standby L/C is an obligation taken on by a bank to make a payment once certain terms and conditios are met.the bank transfer balance after the transaction is don
Standby LC was originally created in the USA who refused to deal with Guarantee product of Tradefinace because it is not controlled by UCP standards or swift, so they initiated Stand by LC that is “LC behaves as LG”.
It is an LC that guarantees the service not the Goods.
By and large Bank Guarantees (BG) and Standby Letters of Credit (SBLC) are similar and has interchangeable use / utlility.
BG is governed by Civil Laws whereas SBLCs are governed by ISP98 issued by ICC.
Practically an SBLC can be used as a collateral to raise finance in certain circumstances.
In international trade / transactions, SBLC is more secured and trusted by bankers as collateral.
