Difference Between Bank Gurantee and Line of Credit
A Letter of Credit, also known as a Documentary Letter of Credit, functions as a negotiable instrument and serves as a payment method. In contrast, a Bank Guarantee is a financial instrument acting as a guarantee of payment. It’s noteworthy that a Standby Letter of Credit can function both as a means of payment and a guarantee of payment.
These financial instruments are regularly issued on a global scale, not only in financial centers like Geneva, Switzerland, but also in hubs worldwide.
Documentary Letter of Credit: A Documentary Letter of Credit is pivotal in international trade, constituting a contract where a bank commits to paying the seller for exported goods. Payment is contingent upon the seller’s presentation of specific documents adhering to the Letter of Credit’s terms and conditions. These documents often need to be duplicated, triplicated, or quadruplicated, focusing solely on paperwork related to exported goods rather than the goods themselves.
Bank Guarantees: There are two primary types of Bank Guarantees: Financial Guarantees and Performance Guarantees. A Financial Guarantee is a commitment by the issuing bank to pay the beneficiary if the applicant fails in their fiduciary duties. A Performance Guarantee, on the other hand, ensures coverage for losses incurred by the beneficiary due to the applicant’s failure in contractual obligations. Various types of Bank Guarantees exist, including Warranty Guarantees, Customs Guarantees, Tender Guarantees, Payment Guarantees, and Advance Payment Guarantees.
A unique type is the Demand Bank Guarantee, designed to address credit and loan shortages. Governed by ICC Uniform Rules for Demand Guarantees (URDG 758), it features precise wording for monetization and is payable upon the first demand. Companies can “lease” a Demand Bank Guarantee from a Bank Guarantee Provider, using it as collateral for loans or lines of credit.
In summary, a Documentary Letter of Credit facilitates payment for exporters globally, while Bank Guarantees act as assurances of payment, also serving to secure loans and lines of credit. Companies facing repeated rejection of credit facility applications from their banks may find valuable information on our Bank Guarantee page.