Difference between Bank Guarantee and Letter of Credit – Payment Methods | Banking
Difference between bank guarantee and letter of credit | LOC | Payment Methods | Banking | Finance | Management Notes
Letter of Credit (LOC) which is also known as Documentary Credit (DC) is the most common mode of payment used in foreign trade which is an obligation taken by a bank to make a payment once certain criteria are met.
A bank guarantee is a guarantee from a lending institution provided by an importer’s depository financial institution which guarantees the payment of required sum to the exporter in case if the borrower defaults on a loan.
Parties Involved in Letter of Credit (LOC)
- Applicant
- Beneficiary
- Issuing Bank
- Nominated Bank
- Advising Bank
- Confirming Bank
Bank Guarantee Vs Letter of Credit
| Basis | Letter of Credit (LOC) | Bank Guarantee (BG) |
Meaning |
Letter of Credit (LOC) which is also known as Documentary Credit (DC) is the most common mode of payment used in foreign trade which is an obligation taken by a bank to make a payment once certain criteria are met. | A bank guarantee is a guarantee from a lending institution provided by an importer’s depository financial institution which guarantees the payment of required sum to the exporter in case if the borrower defaults on a loan. |
Uses |
LOC is used after the transaction takes place. They are used in long term contracts. They are mostly used in international transactions for the international trade. | Bank Guarantee is used in the situation where buyer obtains goods from a seller then runs into cash flow difficulties and can’t pay the seller. They are used in both long term and short term contracts. They are used in domestic international transactions. |
Importance |
LOC ensures that the transactions proceeds as per planned. | It reduces the loss if the transaction does not goes as per planned. |
Risk |
It poses more risk to bank and less on the merchant. | It poses more risk on merchant and less on the bank. |
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(Founder of Management Notes)
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
MBA,BBA.
I am Smirti Bam, an enthusiastic edu blogger with a passion for sharing insights into the dynamic world of business and management through this website.
I hold a MBA degree from Presidential Business School, Kathmandu, and a BBA degree with a specialization in Finance from Apex College,
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