Genuine Bank Guarantee Providers- Lease BG SBLC Providers.

Bank Guarantee or SBLC.

Difference Between Bank Guarantee and SBLC.

There any difference between Standby LC and Bank Guarantee? Let’s discuss. A standby LC and bank guarantee are quite similar products and most often, they are used in international transactions. There are many other similarities between these two products such as — similar purpose, or similar credit checks, etc, but they are different. How? Let’s find out:

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. While different, both bank guarantees and letters of credit assure the third party that if the borrowing party can’t repay what it owes, the financial institution will step in on behalf of the borrower.

By providing financial backing for the borrowing party (often at the request of the other one), these promises serve to reduce risk factors, encouraging the transaction to proceed. But they work in slightly different ways and in different situations.

Letters of credit are especially 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. While letters of credit are primarily used in global transactions, bank guarantees are often used in real estate contracts and infrastructure projects.

KEY TAKEAWAYS.
A bank guarantee is a promise from a lending institution that ensures the bank will step up if a debtor can’t cover a debt.
Letters of credit are also financial promises on behalf of one party in a transaction and are especially significant in international trade.
Bank guarantees are often used in real estate contracts and infrastructure projects, while letters of credit are primarily used in global transactions.

What is Bank Guarantee (BG).

A bank guarantee is a kind of guarantee from a lending organization. The bank guarantee signifies that the lending institution ensures that the liabilities of a debtor are going to be met. In other words, if the debtor fails to perform the obligation, the bank will cover it.

What Is A Standby Letter of Credit (SBLC)

A standby letter of credit is a legal document issued by a bank or a particular financial institution guaranteeing a bank’s commitment towards on-time payment to the seller in the event if the buyer defaults on the agreement provided the seller fulfills the terms & conditions of the contract. It is a loan of last resort from the bank where the issuing bank stays in “Standby Mode” and only interferes after being approached by the seller. This is the first and foremost difference between a bank guarantee and a Standby letter of credit services.

There are many similarities between the two products such as:

1. Both serve similar purpose and intent to the prospective consumers of these products, i.e. minimizing financial risk.
2. Banks performs similar credit checks for both the instrument i.e. issuing parties financial health, credit score and past record. Also, banks require a collateral for both the products.
3. In both the products, the issuing bank replaces the applicant’s credibility with its own. Therefore, the risk for a bank in both the products is similar.

Difference Between Standby Letter of Credit (SBLC) and Bank Guarantee (BG).

Bank guarantees are commonly used by contractors while letters of credit are issued for importing and exporting companies.

Standby Letter of Credit Vs Bank Guarantee.

1. Scope of Usage — A Standby letter of credit significantly takes place in long-term contracts to provide payment security to the beneficiary as per the terms & conditions of the contract. Whereas, bank guarantee services are wider in scope comparatively as it is used in both long-term and short-term transactions. For example, real estate, construction projects, etc.
2. Scope of Protection — Although both of these trade finance instruments ensure that the seller gets paid on-time, there is a legal difference. Just like Standby LC, a bank guarantee protects the seller but at the same time, it also protects the buyer. While in the case of Standby LCs, only sellers are protected by the issuing bank.
3. Legal Difference — There is a big legal difference between a bank guarantee and a Standby LC. A bank guarantee is an obligation subject to civil law whereas a standby LC is subject to banking protocols.
4. Scope of Practicality — A BG is more practical than SBLC. The SBLC can be varied and is used for both financial and non-financial factors. The financial risk factors include on-time payment for the goods, whereas non-financial factors include the requirement of a particular material, or marginal defect, etc. While on the other hand, BG only covers financial performance such as the sale of goods, etc.
5. Type of Payment Covered — The SBLC is considered a secondary type of payment where the bank is only responsible to release the payment if the buyer defaults and the seller fulfills its terms in the contract. In simple words, if the buyer fails to make the payment and the seller meets the mentioned criteria, the issuing bank will make the payment.

Conclusion: It can be concluded that both bank guarantee and Standby LC share some similarities. Both are the legal documents from the bank to assure on-time payment to the seller in case if the buyer defaults. But there are some differences in terms of risk coverage and involvement. These two trade finance instruments are different from each other and the preference depends on the type of transaction taking place.

BECTIC FINANCE COMPANY LIMITED
website : becticfinance.com
Email : info@becticfinance.com
Sktype : bruce.fung001@outlook.com

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