STANDBY LETTER OF CREDIT Vs BANK GUARANTEE.
A standby Letter of Credit 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.
Just like Standby Letter of Credit, a bank guarantee protects the seller but at the same time, it also protects the buyer. While in the case of Standby Letter of Credits, only sellers are protected by the issuing bank. While on the other hand, BG only covers financial performance such as the sale of goods, etc.
Both bank guarantee and standby letter of credit act as an assurance to the creditor that he/she will receive the payment. These requests to the bank are treated as loans and are given based on the debtor’s credibility.
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.
A bank guarantee is a legal statement from a bank or lending institution that the liabilities of the debtors will be fulfilled and in the event, if the borrower defaults on a loan, it will be covered by the issuing bank. In simple words, it is the issuing bank that is responsible to meet the obligations of the borrower in case if he fails to make the payment. It means that the bank guarantee services take place when the borrower is at default.
Standby Letter of Credit.
A standby letter of credit (SLOC) is a legal document that guarantees a bank’s commitment of payment to a seller in the event that the buyer–or the bank’s client–defaults on the agreement. … A standby letter of credit can also be abbreviated SBLC.
A Standby letter of credit is a commitment taken on by a bank to make a payment to a beneficiary once certain criteria are met. Used more commonly by merchants involved in imports and exports of goods on a regular basis. It protects both parties in the transaction but favors the exporter. Example: A LC could be used in the shipment of goods or for the completion of a service.
Main Differences Between Bank Guarantee (BG) and Standby Letter of Credit (SBLC).
1. Bank guarantee has risk protection for both the buyer and seller, whereas SBLC only protects the beneficiary.
2. Bank guarantee involves only a single bank, whereas SBLC involves a third-party bank as well, which is usually a foreign bank.
3. Bank guarantee has a broad scope as it can be used for both short-term and long-term transactions. SBLC is mostly preferred for long term transactions.
4. Bank guarantee is used for both domestic and international transactions, whereas SBLC is preferred for international transactions.
5. Bank guarantee only covers the financial aspect of the guarantee. SBLC covers both financial and non-financial aspects of the guarantee.
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.
Bank guarantee vs SBLC.
Bank guarantee has risk protection for both the buyer and seller, whereas SBLC only protects the beneficiary. Bank guarantee involves only a single bank, whereas SBLC involves a third-party bank as well, which is usually a foreign bank. … SBLC covers both financial and non-financial aspects of the guarantee.
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