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What is difference between L/C and BG, kindly explain in Detail.?


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Old 06-14-2008, 01:35 AM
import import is offline
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Default What is difference between L/C and BG, kindly explain in Detail.?

Letter of Credit(LC) is a documentary credit that is used as part of banking facility to finance a purchase made from a supplier. With issuing an LC, you can purchase from your supplier in which the purchase documents will be issued by your supplier and received by your bank. The bank will eventually verify the documents and make payment to your supplier. Now is that your supplier has been paid and it will be you owing to the bank and you have to settle the payment to your bank.

Bank Guarantee(BG) is a financial guarantee made by your bank for you infavour of a 3rd party. You can use this even for order placement by your customer. For example, your customer wants to place an order worth USD 1,000,000 to you. But you want them to pay you an advance payment (or deposit) for say, USD 400,000. For that payment, they are requesting BG from you. So you can negotiate with your bank for a Bank Guarantee of USD 400,000 by paying some amount (according to your bank margin requirement) say about 25% (USD100,000). Your bank then will issue a BG in favour of your customer in order for you to get your advance payment worth of USD 400,000 from your customer. Your customer cannot withdraw cash (of the Bank Guarantee of USD 400,000) from your bank. This guarantee is just a guarantee promising your customer that in case if you fail to deliver the service or goods to them, then your customer can be paid the same guarantee value.

LC is normally issued to your supplier. BG is normally meant to give confidence or assurance to a 3rd party(normally your customer) that you will deliver whatever you promise to deliver (service or goods).

Hope the above has provided you a better understanding on both terms.
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Old 06-14-2008, 01:35 AM
Achew Achew is offline
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Default What is difference between L/C and BG, kindly explain in Detail.?

Difference between Letter of Credit and Bank Guarantee.
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Old 03-10-2017, 03:18 PM
anneroberts anneroberts is offline
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A letter of credit is an obligation taken on by a bank to make 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 bankguarantee, 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.
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