what's the difference between a bank guarantee and a letter of credit_ _ investopedia

7/24/2019 What's the Difference Between a Bank Guarantee and a Letter of Credit_ _ Investopedia

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A bank guaranteeank guaranteeand aand a letter of creditetter of creditare similar in many ways but they're twoare similar in many ways but they're two

different things. Letters of credit ensure that a transaction proceeds as planned, whileifferent 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.ank 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 criterialetter 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.re 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.his 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 abank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a

line of credit, thesum is only paid if the opposing party does not fulfillthe stipulatedine of credit, thesum is only paid if the opposing party does not fulfillthe stipulated

obligations under the contract. This can be used to essentially insure a buyer or seller frombligations 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.oss or damage due to nonperformance by the other party in a contract.

For example a letter of credit could be used in the delivery of goods or the completion of aor example 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 transactionervice. 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 theccurs. 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, ensuringeller's bank. This letter would substitute the bank's credit for that of its client, ensuring

correct and timely payment.orrect and timely payment.

A bank guarantee might be used when a buyer obtains goods from a seller then runs intobank guarantee might be used when a buyer obtains goods from a seller then runs into cashashflowlowdifficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sumdifficulties 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 theno 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 safetyay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety

measure for the opposing party in the transaction.easure for the opposing party in the transaction.

Thesehese financial instrumentsinancial instrumentsare often used inare often used in trade financingrade financingwhen suppliers, or vendors, arewhen suppliers, or vendors, are

purchasing and selling goods to and from overseas customers with whom they don't haveurchasing and selling goods to and from overseas customers with whom they don't have

established business relationships. The instruments are designed to reduce the risk taken bystablished business relationships. The instruments are designed to reduce the risk taken by

each party.ach party.

For further reading, seeor further reading, see What Is International Trade?hat Is International Trade

Q:: Can I have more than three original Bills of Lading?an I have more than three original Bills of Lading?

There is no restriction on the number of bills of lading that can be issued, but the number issued musthere is no restriction on the number of bills of lading that can be issued, but the number issued mustbe stated on the ...e stated on the ... Read Full Answer >>ead Full Answer >>

Q:: How long does a stock account have to be dormant before it can be escheated?ow long does a stock account have to be dormant before it can be escheated?

A stock account is typically considered dormant and eligible for escheatment after five years ofstock account is typically considered dormant and eligible for escheatment after five years ofinactivity; however, this ...nactivity; however, this ... Read Full Answer >>ead Full Answer >>

Q:: Do banks have working capital?o banks have working capital?

The concept of working capital does not apply to banks since financial institutions do not have typicalhe concept of working capital does not apply to banks since financial institutions do not have typicalurrent assets and ... ead Full Answer >>

What's the difference between a bank guaranteehat's the difference between a bank guarantee

and a letter of credit?nd a letter of credit?Byy Peter Cherewyketer Cherewyk

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he concept of working capital does not apply to banks since financial institutions do not have typicalcurrent assets and ...urrent assets and ... Read Full Answer >>ead Full Answer >>

Q:: How does a bank determine what my discretionary income is when making a loan decision?ow does a bank determine what my discretionary income is when making a loan decision?

Discretionary income is the money left over from your gross income each month after taking out taxesiscretionary income is the money left over from your gross income each month after taking out taxesand paying for necessities. ...nd paying for necessities. ... Read Full Answer >>ead Full Answer >>

Q:: What net interest margin is typical for a bank?hat net interest margin is typical for a bank?

In the United States, the average net interest margin for banks was 3.03% in the first quarter of 2015.n the United States, the average net interest margin for banks was 3.03% in the first quarter of 2015.However, this was ...owever, this was ... Read Full Answer >>ead Full Answer >>

Q:: What are the main benchmarks that track the banking sector?hat are the main benchmarks that track the banking sector?

The appropriate benchmarks for tracking banking sector performance depend on the type of banking.he appropriate benchmarks for tracking banking sector performance depend on the type of banking.For instance, commercial-only ...or instance, commercial-only ... Read Full Answer >>ead Full Answer >>

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Debit Cardebit Card

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A U.S. government savings bond that offers aU.S. government savings bond that offers afixed rate of interest ...ixed rate of interest ...

Credit Unionredit UnionMember-owned financial co-operative. Theseember-owned financial co-operative. Theseinstitutions are created ...nstitutions are created ...

CheckheckA written, dated and signed instrument thatwritten, dated and signed instrument thatcontains an unconditional ...ontains an unconditional ...

Bank Depositsank DepositsMoney placed into a banking institution foroney placed into a banking institution forsafekeeping. Bank ...afekeeping. Bank ...

Cost Of Fundsost Of FundsThe interest rate paid by financialhe interest rate paid by financialinstitutions for the funds ...nstitutions for the funds ...


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