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A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. The letter of credit ensures the payment will be made as long as the services are performed.
A bank guarantee, like a LC, guarantees a sum of money to a beneficiary, Unlike a letter of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
A letter of credit is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase.A Bank guarantee represents a more significant contractual obligation for banks than letters of credit do, it is an undertaking by a bank to cover a debt or risk on a transaction. It ensures the payment of products and services, performance of contractual obligations, guarantee that the work is done or the delivery is done on time etc.
A letter of credit could be used in the delivery of goods or the completion of a service. The seller may request that the buyer obtain a letter of credit before the transaction occurs. The buyer would purchase this letter of credit from a bank and forward it to the seller's bank. This letter would substitute the bank's credit for that of its client, ensuring correct and timely payment.
A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction.
Letter of Credit - Selling a product to a customer is often a leap of faith. Short of requesting cash on delivery or prepayment, you are trusting that your customer will pay as promised. Requesting a letter of credit from your customer requires that he go to a bank and receive a letter stating that the bank will pay after you provide the letter and proof of delivery. A letter of credit eliminates any financial risk to the seller because the payment comes from the third-party bank not the purchaser.
Guarantee - A letter of guarantee acts like a letter of credit with one important distinction -- the letter of guarantee pays either party if the other does not fulfill the transaction's requirements. For example, if you pay your supplier for a shipment before delivery and do not receive your product, and you asked the supplier for a letter of guarantee before sending payment, the bank must reimburse you for the undelivered product. The letter of guarantee entitles you to reimbursement without having to go to court if the shipper is unable to produce proof of delivery.
A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn't go as planned.A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed.A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
