Difference between Bank Guarantee vs Letter of Credit,
LC vs LG
Difference between Bank Guarantee vs Letter of Credit is LC and LG are both promises (agree) from a financial institution that a borrower will be able to repay an obligation to another party, and no matter what the debtor's financial circumstances.
Both LG and LC assure the third party that if the borrowing party can't repay what it owes, the financial institution (usually a well-recognized Bank) 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 the work in slightly different ways and in different situations.
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Difference between Bank Guarantee AND Letter of Credit
· LCs came in to play for 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.
· LC are primarily used in global transactions,
· LG are often used in real estate contracts, infrastructure projects, constructions, project managements and etc.
Bank Guarantee | Letter of Credit | |
1 | Bank Guarantee is an instrument given by the issuing bank to the beneficiary, confirming payment in the event of delay or any fault. | The Letter of Credit is a payment assurance given by the issuing bank, subject to acceptance of LC documents. |
2 | Bank Guarantee, a bank takes responsibility for payment when the client fails to fulfill the commitment or obligation under guarantee terms | Letter of credit, Primary Liability lies with the bank to collect payment from the applicant and remit the funds to Beneficiary according to the payment’s terms. |
3 | The number of parties involved in Bank Guarantees is restricted to the applicant (Issuing Bank), beneficiary and banker | In LC primarily there are 3 parties involve for the LC. And can be more than three, i.e applicant, Applicant bank, beneficiary, beneficiary bank, negotiating bank and confirming bank, intermediary Bank. |
4 | Bank Guarantee is primarily used for domestic transactions and however, there are Bank Guarantees for international trade as well. | Primarily, the letter of credit is used for import/export transactions. However, this is also used for domestic/ local delivery as well, etc. DDP, DAP, Ex work Incoterms |
5 | Payment is made in Bank Guarantee by default of certain terms and conditions. | Payment is honored under successful acceptance LC documents. |
6 | Payment is confirmed in case of payment Guarantees. | Payment can be Confirmed only in Confirmed LC Only. |
Specimen Format- LETTER OF CREDIT vs BANK GUARANTEE
----------------------------------------------------------------------------------------------------------------
MESSAGE CONTENT :
{1:F01BOMLAEADAXXX4887345379}{2:O7002036210715OCBCSGSGAXXX74839102172107151636N}{3:{108:001}}{4:
:27:1/1
:40A:IRREVOCABLE
:20:XXXXX
:31C:210715
:40E:UCP LATEST VERSION
:31D:XXXX COUNTRY NAME
:50:APPLICANT NAME
APPLICANTS ADDRESS
:59: BENEFICIARY NAME
BENEFICIARY ADDRESS
:32B:XXXXXXXXXXX
:41D:ANY BANK
AT SIGHT
BY NEGOTIATION
:43P:ALLOWED
:43T:NOT ALLOWED
:44E:ANY UAE PORT
:44F:SINGAPORE
:44C:210914
:45A:GENUINE SPARE PARTS
.
CFR SINGAPORE (INCOTERMS 2010)
:46A:1. SIGNED COMMERCIAL INVOICE IN
TRIPLICATE.
2. FULL SET OF 3/3 CLEAN 'ON BOARD'
OCEAN BILLS OF LADING WITH 2
NON-NEGOTIABLE COPIES MADE OUT TO THE
ORDER OF BANK NAME(XXX) 'FREIGHT PREPAID' AND NOTIFY
THE APPLICANT.
3. COPY OF SHIPPER'S ADVICE TO XXX INSURANCE
(SINGAPORE) PTE
LTD, 4 SHENTON WAY, HEX21-01 SGX CENTRE
2, SINGAPORE 068807,
FAX NUMBER XXX DECLARING PARTICULARS OF
SHIPMENT AND
QUOTING OPEN POLICY NO : XXXX
:47A:1. ALL BANK CHARGES ARE FOR
ACCOUNT OF BENEFICIARY EXCEPT
LC ISSUING BANK CHARGES
2. A DISCREPANCY HANDLING FEE OF
USD75.00 OR EQUIVALENT FOR
EACH SET OF INVOICES / SHIPPING
DOCUMENTS CONTAINED WITHIN
A PRESENTATION WILL BE DEDUCTED FROM
PROCEEDS IF RESPECTIVE
DOCUMENTS ARE TO CONTAIN DISCREPANCIES.
3. DOCUMENTS TO BE PRESENTED WITHIN 21
DAYS AFTER THE DATE
OF SHIPMENT BUT WITHIN THE VALIDITY OF
THE CREDIT.
4. ALL DOCUMENTS MUST BE PRESENTED TO
US THROUGH BENEFICIARY'S
BANKER.
5. UNLESS OTHERWISE STATED, ALL
DOCUMENTS REQUIRED TO BE
PRESENTED SHALL BE IN ENGLISH.
6. ACCEPTANCE OF ANY DISCREPANCIES IN
ANY DOCUMENTS PRESENTED
SHALL NOT IMPLY OR CONSTITUTE ANY
AMENDMENT OF THE TERMS OF THIS
LETTER OF CREDIT NOR OBLIGE US TO
ACCEPT THE SAME FOR ANY
FUTURE DRAWINGS.
7. PLEASE BE INFORMED THAT SATURDAY IS
TO BE CONSIDERED A
NON-BANKING BUSINESS DAY FOR OUR TRADE
FINANCE PROCESSING/
OPERATIONS UNIT ALTHOUGH OUR BANK MAY
OTHERWISE BE OPEN FOR
BUSINESS.
8. ONE EXTRA PHOTOCOPY OF SHIPPING
DOCUMENTS ARE REQUIRED FOR
ISSUING BANK'S FILE AND WILL NOT BE
RETURNED EVEN DOCUMENTS ARE
FINALLY REFUSED. IF THESE DOCUMENTS ARE
NOT PRESENTED, A
PHOTOCOPY HANDLING FEE OF USD10.00 (OR
EQUIVALENT) PER SET WILL
BE DEDUCTED FROM THE PROCEEDS.
9. ALL PARTIES TO THIS DOCUMENTARY
CREDIT ARE ADVISED THAT THERE
ARE SPECIFIC SANCTIONS AND REGULATIONS
IMPOSED BY THE U.S. AND
OTHER GOVERNMENT AND/OR REGULATORY
AUTHORITIES AGAINST CERTAIN
COUNTRIES, ENTITIES AND INDIVIDUALS.
UNDER THESE MEASURES,BANK GUARANTEE VS LETTER OF CREDIT.
THE BANK MAY BE UNABLE TO PROCESS OR
ENGAGE IN TRANSACTIONS
THAT INVOLVES A BREACH OF SUCH
SANCTIONS, AND AUTHORITIES MAY
REQUIRE DISCLOSURE OF INFORMATION. THE
BANK IS NOT LIABLE FOR
REJECTING ANY PRESENTATION OF DOCUMENTS
THAT MAY CAUSE A
BREACH OF THOSE SANCTIONS, OR DISCLOSES
INFORMATION AS A
RESULT OF ACTUAL OR APPARENT BREACH OF
SUCH SANCTIONS. THIS
CLAUSE APPLIES NOTWITHSTANDING ANY
INCONSISTENCY WITH THE
CURRENT EDITION OF THE INTERNATIONAL
CHAMBER OF COMMERCE
UNIFORM CUSTOMS AND PRACTICE FOR
DOCUMENTARY CREDITS.
10. THE AMOUNT OF ALL UTILIZATIONS
UNDER THIS CREDIT MUST BE
ENDORSED ON THE BACK OF THE ORIGINAL
CREDIT BY THE PRESENTING /
PAYING / ACCEPTING / NEGOTIATING BANK
AND THE PRESENTING /
PAYING / ACCEPTING / NEGOTIATING BANK
MUST CERTIFY TO THIS
EFFECT IN THEIR COVERING LETTER.
11. BENEFICIARY'S CONTACT PERSON : ABC
XXXX
12. SECOND ADVISING BANK'S FULL
ADDRESS:
XXXXX
:49:WITHOUT
:78:1. ALL DOCUMENTS MUST BE SENT BY
COURIER SERVICE IN 1 LOT TO OUR
ADDRESS AT 31 TAMPINES AVENUE 4, 2ND
FLOOR SINGAPORE 529680
AND MARKED TO THE ATTENTION OF IMPORT
BILLS, TRADE FINANCE
OPERATIONS.
2. WE SHALL REMIT BY TT TO YOU UPON OUR
RECEIPT OF DOCUMENTS AND
CONFIRMATION THAT THE TERMS OF THE
CREDIT HAVE BEEN COMPLIED
WITH.
:57D:BANKXXXX
(FULL ADDRESS REFER FIELD 47A)
-}{5:{MAC:00000000}{CHK:CDAD46B1BE11}}{S:{SAC:}{COP:S}}
+
WE ARE ENCLOSING HEREWITH ORIGINAL LETTER OF CREDIT.KINDLY PRESENT
THIS CREDIT WITH THE DOCUMENTS
WHEN SUBMITTING FOR NEGOTIATION.
+
THIS LC IS ONLY ADVICE TO OUR CORRESPONDENT'S LETTER OF CREDIT AND
CONVEYS NO ENGAGEMENT OR RESPONSIBILITY ON OUR PART TO NEGOTIATE
THE DOCUMENTS.
+
WHILE SUBMITTING THE DOCUMENTS, PLEASE PRESENT ONE COPY/PHOTOCOPY
OF
EACH DOCUMENTS FOR OUR FILE. IN CASE COPIES ARE NOT ATTACHED WE
WILL
BE CHARGING THE AMOUNT OF USD 10.00 OR EQUIVALENT THEREOFF.
+
PLEASE EXAMINE THIS INSTRUMENT CAREFULLY. IF YOU ARE UNABLE TO COMPLY
WITH THE TERMS OR CONDITIONS, PLEASE COMMUNICATE WITH YOUR BUYER TO
ARRANGE FOR AN AMENDMENT. THIS PROCEDURE WILL FACILITATE PROMPT
HANDLING WHEN DOCUMENTS ARE
PRESENTED.
+
ALL PARTIES TO THIS DOCUMENTARY CREDIT ARE ADVISED THAT SPECIFIC
SANCTIONS/EMBARGOS ARE IMPOSED BY REGULATORY AUTHORITIES / AGENCIES
(INCLUDING THE USA, UK, EU, UN) AGAINST CERTAIN COUNTRIES,
ENTITIES,
INDIVIDUALS, VESSELS,GOODS UNDER THESE MEASURES, BANK MAY NOT BE
ABLE
TO ENGAGE IN THE TRANSACTION (ACCEPT OR NEGOTIATE ANY DOCUMENTS OR
SETTLE
ANY TRANSACTIONS) THAT IN ITS OPINION WOULD BREACH APPLICABLE
SANCTIONS BANK GUARANTEE VS LETTER OF CREDIT.
+
THIS ADVICE IS SUBJECT TO THE UNIFORM CUSTOMS AND PRACTICES FOR
DOCUMENTARY
CREDITS(2007 REVISION) INTERNATIONAL CHAMBER OF COMMERCE PUBLICATION NO
600.
(THIS IS COMPUTER GENERATED ADVICE. NO
SIGNATURE REQUIRED)
Specimen
Format- BANK GUARANTEE
ABC COMPANYX
XXXX
Date [ ]
Dear Sirs,
Tender Bond
No. [ ] (the “Bond”)
WHEREAS our clients, [ ] (“the Bidder”) are
tendering for [description of project] and as further described in the RFP
documents.
And whereas the
RFP documents provide that the Form of Tender shall be accompanied by a Tender
Bond.
In
consideration of the above, we [name of bank], hereby irrevocably and
unconditionally undertake that, forthwith upon our receiving written notice
from you stating that in your sole and absolute judgment the Bidder has failed
to observe or perform any of the terms or conditions of the Form of Tender and
the RFP documents (or, if its Tender has been accepted and the Form of
Agreement referred to therein has been signed, of the Agreement on its part to
be observed or performed) we will, notwithstanding any objection which may be
made by the Bidder, pay to you an amount as you may in such notice require not
exceeding (when aggregated with any such amount(s) previously so paid) the
amount of this Bond, namely COUNTRY - CURRENCY <insert amount>
This Bond shall
be valid from the date hereof and shall continue to be so valid with respect to
any such written notice to us as is received by us not later than [insert] or,
if it be earlier and the Bidder’s Tender has been accepted, the date of
delivery to you of the Performance Bond (as defined in the Conditions of
Contract). This Bond shall not be valid with respect to any written notice
received by us after such date (or earlier date) and shall thereafter be null
and void. When the validity of this Bond has expired it must be returned to us
for cancellation but we shall be released from any obligation hereunder even if
such return has not taken place.
Any payment by
us hereunder shall be in immediately available and freely transferable CURRENCY
free and clear of and without any deduction for or on account of any present or
future taxes, levies, imposts, duties, charges, fees, deductions or withholding
of any nature whatsoever and by whomsoever imposed.
Our obligations hereunder are of
a continuing nature, constitute direct primary irrevocable and unconditional
obligations, shall not require any previous notice to or claim against the
Bidder or any other person, and shall not be discharged or otherwise prejudiced
or adversely affected by any time, indulgence or forbearance which you may
grant to the Bidder, any Bank Guarantee vs Letter of credit unenforceability or invalidity of, or any amendment,
modification or extension which may be made to, the Form of Tender or the RFP
documents or the Agreement or the work to be performed thereunder, any
intermediate payment or other satisfaction made by us, any change in the
constitution or organization of the Bidder, or any other matter or thing which
in the absence of this provision would or might have that effect except a
discharge or amendment hereof expressly made or agreed to by you in writing.
This
Bond shall be governed and construed in accordance with the laws of the Emirate
of Abu Dhabi and the federal laws of the COUNTRY to the extent applicable in
the country
Yours
faithfully,
(Authorized Signatory of the Bank)
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