In banking, LC stands for Letter of Credit, and BG stands for Bank Guarantee. Both are financial instruments used to mitigate risk in transactions.
Letters of Credit (LC)
A Letter of Credit is a financial commitment issued by a bank on behalf of a buyer (or applicant) to a seller (or beneficiary), assuring payment upon presentation of conforming documents as specified in the LC. According to the provided reference, letters of credit are particularly important in international trade.
Key Aspects of Letters of Credit:
- Purpose: To ensure the seller receives payment, even if the buyer defaults.
- Usage: Primarily used in international transactions where parties may not know or trust each other.
- Example: An importer in the US wants to buy goods from a manufacturer in China. The US importer's bank issues an LC, guaranteeing payment to the Chinese manufacturer upon shipment and presentation of required documents (e.g., bill of lading, invoice).
Bank Guarantees (BG)
A Bank Guarantee is an irrevocable undertaking by a bank to pay a specific sum to a beneficiary if the applicant fails to fulfill a contractual obligation.
Key Aspects of Bank Guarantees:
- Purpose: To protect the beneficiary against losses if the applicant fails to perform as agreed.
- Usage: Commonly used in real estate contracts and infrastructure projects, as stated in the reference.
- Example: A construction company needs to assure a project owner that they will complete the project. The company's bank issues a BG to the project owner, guaranteeing payment if the construction company fails to fulfill its contractual obligations.
Key Differences in a Table
| Feature | Letter of Credit (LC) | Bank Guarantee (BG) |
|---|---|---|
| Primary Use | International Trade | Real Estate, Infrastructure Projects |
| Payment Trigger | Presentation of conforming documents | Failure to fulfill contractual obligations |
| Purpose | Assurance of payment to the seller | Protection against non-performance by the applicant |
