We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Is the Difference between a Letter of Credit and Bank Guarantee?

By Jerry Morrison
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

The primary difference between a letter of credit and bank guarantee is the level of responsibility assumed by the bank. The two also differ in their purpose, the frequency of their use, and the parties involved. A letter of credit is generally used in international trade to assure that transactions proceed as planned. A bank guarantee helps assure that financing will be available for a project should one of the parties involved become insolvent. This arrangement is often seen in construction projects and infrastructure development.

In international trade, the seller wants to make certain that payment is forthcoming, and the buyer wants to make sure that the order has been shipped. A letter of credit (LC) facilitates this process. The buyer would contract with a bank to issue a LC. This contract stipulates the terms to be fulfilled for payment to the seller and the obligation of the buyer to repay the bank.

The issuing bank sends the letter of credit to the seller stating the terms. Typically, this involves presenting a standard shipping document, such as a bill of lading. The seller is paid by the bank upon presentation of this document. The bank then forwards the bill of lading to the buyer, who would present it to the carrier and receive shipment of the order. The buyer then repays the bank.

The only responsibility of the issuing bank is to make payment when presented with the agreed upon documents. A letter of credit depends on the contractual arrangement between the issuing bank and the buyer. It is not the bank's responsibility to oversee the contract between the buyer and seller. Any violation of the terms of that contract would have nothing to do with the handing of a LC. For example, if the seller presented the proper documentation and was paid, but had shipped a defective product, the buyer would still have to repay the issuing bank.

The issuing bank assumes a greater liability with a bank guarantee. In this situation, the bank accepts liability for the payment of the debt or performance of some duty for a party to an agreement. If the party becomes insolvent, or fails to complete contractually obligated requirements, then the bank assumes responsibility and must make good on the terms of the contract. Such a guarantee is often necessary when public bonds are to be issued.

The usage disparity between a letter of credit and bank guarantee can be seen in the underlying roles they play. A LC facilitates trade without becoming directly involved in the contractual obligation between the parties. In a bank guarantee, the issuer is intimately involved in the contractual terms and the performance of the parties involved. Both work to lessen risk, but the depth of involvement and liability accepted by the issuing bank distinguishes the two.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Discussion Comments
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.