Bank Guarantee and Standby Letter of Credit guarantee sellers that they will get paid in case buyers fail to fulfill their obligations. The seller can “call in” the bank guarantee or the letter of credit to and get reimbursed.
Stimulating International Trade
Both these instruments are popular among businesses and entrepreneurs involved in international trade because of uncertainties of international sales and foreign exchange rate fluctuations.
A Bank Guarantee Protects Both Sellers and Buyers
Even though the main purpose of these documents is to ensure that the seller will receive the payment, a bank guarantee also ensures that the other party as well. Buyers prefer a bank guarantee so that they can be reimbursed if something goes wrong with the delivery or the item’s condition.
Bank Guarantees triggered by the failure of the contractual obligations of either buyer or seller. Letters of Credits on the other hand, can be triggered by the sale.
Letter of Credit ensures that a transaction proceeds according to the predetermined terms of the contract. BG reduces the loss if the transaction does not go as it is planned.
Letters of Credit are usually used in the international trade agreements but Bank Guarantees are mostly used in infrastructure projects and real estate contracts.
Letters of credits are more commonly used by export and import businesses. Bank Guarantees are more appropriate for government contracts including huge infrastructure projects and real estate contracts.