Difference between Bank Guarantee and LoC
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
28 March 2011
Hi Friends!
Please let me know what is the difference between Bank guarantee and Letter of credit?
And how are they helpful to business?
Please let me know what is the difference between Bank guarantee and Letter of credit?
And how are they helpful to business?
28 March 2011
A bank guarantee and a letter of credit are similar in many ways but they're two different things. Letters of credit ensure that a transaction proceeds as planned, while bank guarantees reduce the loss if the transaction doesn't go as planned.
A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed.
A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
For example a letter of credit could be used in the delivery of goods or the completion of a service. The seller may request that the buyer obtain a letter of credit before the transaction occurs. The buyer would purchase this letter of credit from a bank and forward it to the seller's bank. This letter would substitute the bank's credit for that of its client, ensuring correct and timely payment.
A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction.
These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships. The instruments are designed to reduce the risk taken by each party.
for more information:-
http://www.castleconsultants.in/pdf/LCAndBGComparisionCastle.pdf
A letter of credit is an obligation taken on by a bank to make a payment once certain criteria are met. Once these terms are completed and confirmed, the bank will transfer the funds. This ensures the payment will be made as long as the services are performed.
A bank guarantee, like a line of credit, guarantees a sum of money to a beneficiary. Unlike a line of credit, the sum is only paid if the opposing party does not fulfill the stipulated obligations under the contract. This can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.
For example a letter of credit could be used in the delivery of goods or the completion of a service. The seller may request that the buyer obtain a letter of credit before the transaction occurs. The buyer would purchase this letter of credit from a bank and forward it to the seller's bank. This letter would substitute the bank's credit for that of its client, ensuring correct and timely payment.
A bank guarantee might be used when a buyer obtains goods from a seller then runs into cash flow difficulties and can't pay the seller. The bank guarantee would pay an agreed-upon sum to the seller. Similarly, if the supplier was unable to provide the goods, the bank would then pay the purchaser the agreed-upon sum. Essentially, the bank guarantee acts as a safety measure for the opposing party in the transaction.
These financial instruments are often used in trade financing when suppliers, or vendors, are purchasing and selling goods to and from overseas customers with whom they don't have established business relationships. The instruments are designed to reduce the risk taken by each party.
for more information:-
http://www.castleconsultants.in/pdf/LCAndBGComparisionCastle.pdf
28 March 2011
on the other hand please noted that :-
Letter of Credit
A letter of credit is issued by a bank to a purchaser at the request of the seller. The seller asks for this to avoid payment issues in the future. A bank must approve a letter of credit, and once specific criteria are met, the bank issues the seller a check if the buyer does not have the funds. Letters of credit use the bank's credit, not the buyer's, when agreeing to make the sale.
Bank Guarantee
A bank guarantee does the same thing. However, it also protects an opposing party in the sale. If a buyer runs into cash flow problems, a bank guarantee is used to pay the bill to the seller. If a seller cannot provide the goods agreed upon, a bank guarantee is used to pay the buyer the money he would have paid the seller.
Letter of Credit
A letter of credit is issued by a bank to a purchaser at the request of the seller. The seller asks for this to avoid payment issues in the future. A bank must approve a letter of credit, and once specific criteria are met, the bank issues the seller a check if the buyer does not have the funds. Letters of credit use the bank's credit, not the buyer's, when agreeing to make the sale.
Bank Guarantee
A bank guarantee does the same thing. However, it also protects an opposing party in the sale. If a buyer runs into cash flow problems, a bank guarantee is used to pay the bill to the seller. If a seller cannot provide the goods agreed upon, a bank guarantee is used to pay the buyer the money he would have paid the seller.
28 March 2011
if u not satisfied please tell me, i will remain you.
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Forgot to update debit note in gst
- Can we claim ITC in 28%
- Relief Calculation u/s 89 of ITax 1961 in TableA Form10E
- Applicability of RCM on Frieght Inward supplies received from un-registered person
- Expenses add back in profit
- Can we issue an invoice today
- SALE OF GOODS FROM OTHER STATE
- Accounting Policies changes
- Credit note Issue reg
- Running non ac bus under contract with roadways
- CA Final exammm
- ADDITIONAL PLACE OF BUSINESS DOCUMENTS
- Are You Looking For an Easy Academic Help?
- Wrongly goods delivered to other state
- Tds on GST in connection with sale to public company
- B2B Amendment
- Restoration of certificate of practice
- Regarding change in correspondence address in SSP portal
- Regarding Advance Tax not claimed in the Return of Income for A.Y. 2025-26
- No Compliences after incorporation
Trending Online Classes
-
DT & Audit (Exam Oriented Fastrack Batch) - For May 26 Exams and onwards Full English
CA Bhanwar Borana & CA Shubham Keswani
CAclubindia
