Do you require a Letter of Credit from the Bank, How Letter of Credit in Delhi works, It is a letter from the bank guarantee to conclude your import deal?
Bank Guarantee vs Letter of Credit
Bank Guarantee vs Letter of Credit
A bank guarantee is a financial promise from a lending institution that ensures the bank guarantee will take responsibility if a debtor does not cover a debt.
Letters of credit are also financial promises on behalf of one party in a transaction and have especial significant in international trade.
There are differences between a bank guarantee and a letter of credit.
- Bank guarantees are used in real estate contracts and infrastructure projects, while letters of credit are primarily used in global transactions.
- A bank guarantee and a letter of credit are both promises from a financial institution that a borrower will be able to repay a debt to another party, no matter what the debtor's financial circumstances.
- Both bank guarantees and letters of credit assure the third party that if the borrowing party cannot repay what it owes, the financial institution will step in on behalf of the borrower.
- By providing financial backing for the borrowing party, these promises serve to reduce risk factors, encouraging the transaction to proceed. But they work in slightly more diverse ways and in different situations.
- Letters of credit are important in international trade due to the distance involved, the potentially differing laws in the countries of the businesses involved, and the difficulty of the parties meeting in person.
- Letters of credit are primarily used in global transactions; bank guarantees are often used in real estate contracts and infrastructure projects.
