What is the difference between LC and LG, and Why we need both of them and in which situation..? (2024)

FAQs

What is the difference between LC & LG? ›

A letter of guarantee is different from a commercial letter of credit, which commits the bank to pay the supplier directly on your behalf when the services are rendered, whether your company has the ability to pay, or not.

A letter of credit is a document sent from a bank or financial institution that guarantees that a seller will receive a buyer's payment on time and for the full amount. Letters of credit are often used within the international trade industry.

Bank Guarantee vs Letter of Credit

A bank guarantee is a promise made by a lending institution that the bank will step up if a debtor is unable to repay a debt. Letters of credit, which are financial promises made on behalf of one party in a transaction, are particularly important in international trade.

With a guarantee, the seller's claim goes first to the buyer, and if the buyer defaults, then the claim goes to the bank. With letters of credit, the seller's claim goes first to the bank, not the buyer.

A Letter of Guarantee (LG) issued by KFH covers an agreement by the Bank to pay another party (the beneficiary) if the Bank's customer (the principal or applicant) defaults in his debt or obligation (a job contract) to the beneficiary. Main types of LG include: Tender Guarantee.

Types of letters of credit include commercial letters of credit, standby letters of credit, and revocable letters of credit. Other types of letters of credit are irrevocable letters of credit, revolving letters of credit, and red clause letters of credit.

Fraud Risks

The issuance of an LC has a variety of complex governing rules and some buyers or sellers can misuse it to take advantage of it. A letter of credit implies fraud risks to the importer. The bank is supposed to pay the exporter after reviewing the shipping documents, not the actual quality of the goods.

Disadvantages of a letter of credit:

Expensive, tedious and time consuming in terms of absolute cost, working capital, and credit line usage. Additional need for security and collateral to satisfy bank's coverage terms for the buyer. Lengthy and laborious claims process involving more paperwork for the seller.

Often secured by inventory and accounts receivable, lines of credit are considered “demand” loans, meaning the financial institution can demand full repayment at any time.

What is the alternative to a letter of credit? ›

Aside from trade credit insurance, there are other alternatives to a letter of credit. Those include: Purchase order financing: Purchase order financing provides you cash up front to complete a purchase order. Under this agreement, a financing company pays your supplier for goods you need to fulfill a purchase order.

A Letter of Credit (LC) is a document that guarantees the buyer's payment to the sellers. It is issued by a bank and ensures timely and full payment to the seller. If the buyer is unable to make such a payment, the bank covers the full or the remaining amount on behalf of the buyer.

Performance LC means a Letter of Credit issued by a Lender or other Person for the account of the Borrower or a Subsidiary to a party, as beneficiary, to which the Borrower, or such Subsidiary owes certain performance obligations in connection with its real estate development and homebuilding activity in the ordinary ...

The performance letter of credit puts the bank issuing the document as the go between with the buyer and seller. The performance letter of credit protects the buyer's money until the seller delivers the goods, and it protects the seller because it guarantees the seller payment upon delivery or proof of shipment.

A Standby Letter of Credit is paid when called on after conditions have not been fulfilled. However, a Documentary Letter of Credit is the guarantee of payment when certain conditions are met, and documents are compliant with those conditions.

The full form of LC is a Letter of credit. A letter of credit is used mostly in international transactions where the document the buyer's bank gives, known as the issuing bank, guarantees that the buyer will pay the seller the correct amount.

Letter of Credit (LC) - Confirmed

An L/C guaranteed by both the issuing and advising banks of payment so long as seller's documents are in order, and the L/C terms are met. Only applied to irrevocable L/C's. The confirming bank assumes the credit risk of the issuing bank.

An irrevocable letter of credit cannot be changed or cancelled unless everyone involved agrees. Irrevocable letters of credit provide more security than revocable ones. A confirmed letter of credit is one to which a second bank, usually in the exporter's country adds its own undertaking that payment will be made.

A bank guarantee or a letter of credit is a financial guarantee for a borrower. Both demonstrate to a third party that their invoices will be paid even if the borrower cannot conjure up the funds.