Home / Blog / The Difference Between A Letter of Credit and A Bank Guarantee

The Difference Between A Letter of Credit and A Bank Guarantee

When dealing with various trade agreements, you can often get confused between a letter of credit and bank guarantee, or LC. Although they match in various functionalities and features, there are some subtle and marked differences in between these two financial instruments. A top financial consultant or a reputed banking institution in the UAE can explain the differences coherently. This blog does its bit in explaining you the differences in simple words.

Commitment and Obligations

When particular criteria pertaining to a trade deal and financial agreement are met, the letter of credit aims to pay the concerned beneficiary. Whereas in case of a bank guarantee, when the trading partner or the other party involved in the business does not comply by the regulations of the deal, the bank has to pay you. If you are the seller, and you meet the criteria of the deal or the contract, even if payment for your products is not cleared, that bank pays you via processing the bank guarantee.

Commitment and Obligations

The Difference in Types of Merchants

When you are dealing in the processing of an LC, usually the merchants who are engaged in export and import business of goods and/or services are included in the financial dynamics. But when the financial instrument is a bank guarantee, the nature of the merchants involved changes. In this case, the contractors and businesspersons who are operating in the arena of real estate development and huge construction projects are included in the commercial network. The bank guarantee lets you to successfully bid for critical infrastructure projects.

Favoring Exporter or Importer?

An important question might float in your mind about the kind of favor you would expect as an importer or an exporter from these financial instruments. If you are an exporter, then a letter of credit or LC would favor you. You would receive the payment from the bank after complying by all the relevant regulations. But if you are an importer in the UAE, then the bank guarantee comes to your rescue. Still, in both the cases, both the parties have some benefits that prosper their business.

Bank Guarantees

Difference in Practical Implementation

As an exporter, when you are shipping the final products to the imported residing in another country, or delivering a completed service, the letter of credit is being implemented. But if you are the buyer or the importer, and are facing some financial crunch, the bank guarantee comes into play.

This source is extremely helpful if you want to gather valuable information about LC and bank guarantees, or if you want to apply for them.