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Major Difference between Letter Of Credit Vs Bank Guarantee


You may find few similarities between Letter of Credit vs Bank Guarantee. But actually both are individual trade finance facilities that serve a specific purpose. LC MT70 and BG MT760 gives payment assurance to the seller. LC assures payment, only if the seller complies the LC terms. Whereas, BG MT760 acts a payment assurance. Further, the bank promises to meet the financial obligations, in case of buyer’s default.

Definition: Letter Of Credit vs Bank Guarantee

Letter of Credit and Bank Guarantee are the popular trade finance instruments. These are most often used by traders to conclude their trade deal. Both MT700 & MT760 are issued by a bank on behalf of its client and in favor of their seller.

Letters of Credit issued on behalf of the buyer assures the seller that they will receive the payment for the supplied goods on time and on the specified currency. Also, it guarantees, that if the buyer is unable to make the payment, then the bank will cover the payment on the purchase. And to receive the payment, the seller must present the documents as stated in the LC. Here the payment made, only when the specific conditions are fulfilled.

Bank Guarantee is a type of guarantee issued by a bank on behalf of its client to guarantee the payment, if the buyer defaults. Here the payment done, in case of non fulfillment of payment terms.

Difference: Letter of Credit vs Bank Guarantee

Once the buyer and seller entered into a new trade deal, Sales and Purchase Agreement will be drafted. Based on the contract, the buyer request their bank to issue LC MT700. And, it acts as payment assurance which includes a certain set of criteria to meet by both the buyer and the seller.  This assures that the seller will receive the payment, once the goods or services are shipped, as per the agreed T&Cs. And also, upon the submission of documents as stated in the LC. 

Whereas, when it comes to BG MT760, it promotes confidence that will greatly encourage the trade transaction. Further, it gives a ‘promise’ to make payment to a seller, under certain cases – such as the failure of obligations from the buyer.

Letters Of Credit vs Bank Guarantees (LC MT700 vs BG MT760)

To secure the trade, the seller request their buyer to furnish an LC MT700 before both of the parties proceed with the deal. Accordingly, the buyer will provide the LC in favor of the seller. And this LC gives assurance to the seller that they will receive the payment within a certain set time limit. And in case, if the buyer didn’t make the payment as agreed, then the bank will pay the seller. 

Likewise, Bank Guarantees assures that when a buyer faces a financial crisis and unable to pay the seller to acquire the commodities. Then, the bank can undertake the obligations on behalf of the buyer. By doing so, it can bridge the of the buyer. Nowadays, sellers mostly prefer to do business with traders who are ready to provide BG MT760 in their favor.

These two tools often used by buyers and sellers in trade financing to conclude their trade deals. Because, among all financial services, LC MT700 and BG MT760 said to lessen the hazard by both parties.

If you’re a trader who require LC MT700 or BG MT760 for your trade deal. Then, you may have two choices – Contacting Banks or getting help Trade Finance Providers like Bronze Wing Trading. But if you contact other sources to avail trade finance services; they may demand you to provide certain cash margin or tangible collateral.

But unlike private sectors, we won’t demand cash margin or tangible collateral to provide trade finance on behalf of your company. Rather, we provide all trade finance services such as LC MT700, Standby LC, BG MT760, BCL MT799 and etc.. at ZERO cash margin.

Do you require LC or BG MT760 for your trade deal? Contact us now!

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