A letter of credit is written commitment document issued by a bank or other financial institutions to assure payment to seller on the basis of documentary proof on fulfillment of performance by seller as per terms and conditions mentioned in LC. Under an LC, the seller gets guarantee on payment of his sale of goods from the buyer’s bank. I request readers to go through my different articles in detail in this website, already explained.
What is a bank guarantee and how does BG work?
A bank guarantee is a commercial instrument guaranteeing by bank to a party (parties) on behalf of his customer, assuring the beneficiary to effect payment on default of obligation.
How to differentiate a Letter of Credit and a Bank guarantee?
As per Letter of Credit, once the obligation on production of documents on fulfillment of contract, the bank pays amount to beneficiary. However, in a bank guarantee, the beneficiary is paid on non fulfillment of obligation as per contract of BG.
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