In international trade, Bank Guarantees (BGs) and Letters of Credit (LCs) play pivotal roles in fostering trust between buyers (importers) and suppliers (exporters). Both instruments minimize the risk of non-payment or non-performance, ensuring smoother transactions. However, their purpose and usage differ significantly, catering to specific trade requirements.

What is a Letter of Credit?

A Letter of Credit (LC) is a financial contract issued by a bank guaranteeing the supplier’s payment, provided they meet the conditions set forth in the LC. The process involves the buyer and seller entering a sales agreement, followed by the buyer’s application for an LC with their bank (issuing bank). The issuing bank forwards the LC to the supplier’s bank (advising bank), outlining the terms for payment.