Difference between Bank Guarantee & Letter of Credit

Bank Guarantee Vs Letter of Credit

A Bank Guarantee and a letter of credit are promises from a financial institution. A borrower will actually want to reimburse an obligation to another party, regardless of the account holder’s financial conditions. While different, both bank guarantee and letter of credit, guarantee the third party that if the acquiring party can’t reimburse what it owes, the financial organization will step in for the benefit of the borrower. A Bank guarantee is similar to a Letter of credit but not the same. Let’s understand the difference between a bank guarantee and a letter of credit.

What is Bank Guarantee?

A bank guarantee refers to a contract. Wherein the bank gives the guarantee on behalf of the customer to the beneficiary, that the bank will be responsible for payment, In case the customer defaults in discharging obligations. BG settles the debts of the debtor. Thus, in case the borrower defaults on the loan, the lender promises to pay.

Understand Bank Guarantee in detail.

Types of Bank Guarantee:

1. Confirmed Payment Guarantee

This is an irrevocable obligation, with this a specific amount is paid by the bank to a beneficiary on behalf of the client by a certain date.

2. Shipping guarantees

A written guarantee is presented to the carrier in the event of goods arriving before the arrival of the shipping documents.

3. Loan guarantees

An institution that issues a loan guarantee pledges to take on the financial obligation if the borrower defaults.

How does Terkar Capital execute the bank guarantee instrument?

What is a Letter of Credit?

A letter of credit is a financial document for assured payments. i.e. An undertaking of the buyer’s bank to make payment to the seller, against the documents stated. The bank issues a letter of credit. In case, the buyer makes a default payment, the bank gives a guarantee to pay. So, LC discounting takes away the risk. The seller gets assurance for the funds.

Types of Letter of Credit

1. Irrevocable letter of credit

An irrevocable letter of credit is a guarantee from a bank, issued in the form of a letter. Thus, an agreement is created. Wherein the buyer’s bank agrees to pay the seller as soon as certain conditions of the transaction are met.

2. Confirmed letter of credit

This refers to an additional guarantee obtained by the borrower in addition to the first letter of credit from another bank. This is done in case there is an issue with the credibility of the first bank issuing LC.

3. Import letter of credit

Import letter of credit is issued by the importer’s bank on behalf of the importer with the exporter being the beneficiary. A guarantee is given by the importer bank that the payment will be made to the seller/exporter.

4. Export letter of credit

The letter of credit, when received by the exporter’s bank, becomes an export letter of credit. Before the exporter can receive payment, he has fulfilled certain terms and conditions and submitted the required documents as mentioned in the letter of credit.

5. Revolving letter of credit

A single revolving letter of credit can cover several transactions between the same buyer and seller.

How Terkar Capital executes a Letter of credit instrument?

Why choose Terkar Capital?

Terkar Capital provides top investment banking services in India. We consult the aspiring entrepreneurs and promote seamless funding solutions to them. We arrange and provide a wide range of products as per the clients’ needs and expectations. Our team of experts constantly guides the clients in each and every step of the funding process. Thus, preserving the confidentiality of the respective clients.

What is Bank Guarantee? Features, Process, and its Difference from Letter of Credit

Bank Guarantee Services

Every business needs a backbone of funds. It is for its effective operations and to maintain the competition in the market. Moreover, there are several debt instruments available for funding. While Bank Guarantees are used the most. In this article, we’ll shed light on what is a bank guarantee, its key features, its process, and how it differs from the Letter of Credit. 

What is Bank Guarantee?

The bank guarantee is a commitment provided by the buyer’s bank. It ensures that if the buyer fails to fulfill their obligations or make the payment, the bank will step in and make the payment, up to the specified amount mentioned in the guarantee. The lending institution offers Bank Guarantee (BG) as a financial instrument. However, the lender will ensure that the liabilities of a debtor will meet. In other words, the lender promises to cover a loss in case the borrower defaults on the loan. In the process of BG, four parties are involved in the transactions. Those are the applicant/ borrower, the issuing bank, the beneficiary and the beneficiary bank.

Features of Bank Guarantee

• BG builds confidence between the lender and the borrower. It adds assurance of transaction between an exporter and an importer. The primary reason for opting for BG is that many times the exporter and importer are unaware of transacting with each other. So, there can be a risk in the transaction. Hence, to overcome this risk involved, Bank Guarantee clears the hurdles.
• The BG obtain for a specified period. It is as per the need and requirements of the borrower. The applicant can hold the BG only up to a specified period, they can further renew it after maturity.
• The bank guarantee can or cannot hold assets against the instrument. The collateral depends upon the availability of the asset and the terms & conditions of the agreement between the lender and the borrower. It is also obtained without collateral.

Parties Involved in the Bank Guarantee Process 

• The applicant (importer): who requests BG from his banker as per the demand from the beneficiary
• The issuing bank: as per the request from the applicant, the bank issues the BG on the beneficiary’s bank.
• The beneficiary (exporter): is the party who demands BG.
• The beneficiary’s bank: is the one who receives the BG on behalf of the beneficiary.

How does a bank guarantee work?

“ABC Pvt Ltd” is an exporter company that deals with “XYZ Pvt Ltd”, and an importer. The exporter shipping goods requests the importer to get the Bank Guarantee from his banker. The banker on demand from the customer applies for BG and reduces the risk involved in the transactions. After receiving the BG, the applicant submits a copy to his other party which eases the procedure in the business operations. Here, “XYZ Pvt Ltd” is the applicant, the bank is an issuing party and “ABC Pvt Ltd” is a beneficiary.

In case of non-performance or default, the beneficiary can submit a claim to the bank.  The bank evaluates the claim and, if valid, settles the claim by making payment or fulfilling the obligation as specified in the bank guarantee.

Apply for Bank Guarantee

• The parties while transacting with each other, the exporter demands BG from the importer.
• The importer requests his bank for the BG and submits the necessary documents.
• After preparing BG, the bank communicates the same to the importer.
• The importer then requests the bank to send the BG to the exporter’s bank.
• The exporter’s bank on receiving BG communicates the same to the exporter.
• The exporter then ships the goods towards the importer after receiving the BG from the importer.

Here is the case study of the Bank Guarantee Process.

Difference between a Bank Guarantee (BG) and a Letter of Credit (LC)

In the case of BG, payment has been made only in case of a default of the buyer. And, in the case of LC, payment has been made on behalf of the customer after receiving the goods.

In the case of BG, payment is made at the non-fulfillment of the transaction between the parties. Whereas the LC payment is made only after the fulfillment of the condition specified.

To learn the difference in details Read here. 

Terkar Capital: Bank Guarantee Provider

At Terkar Capital, we specialize in assisting aspiring entrepreneurs and providing them with seamless funding solutions. While Bank Guarantee is among them. We understand the unique needs and expectations of our clients, and accordingly, we arrange and offer a wide range of financial products. Our team of experts is dedicated to guiding clients through every step of the funding process, ensuring their success while maintaining strict confidentiality.