What is difference between Letter of Credit and Bank Guarantee ?

This two terminology looks similar but both are very different. When one wants to expand the business means beyond the national boundary or within, one needs assurance from the buyer side that after delivery of goods or services the payment will receive and this can be done by the bank only.
In short, both these terms are used while doing business or transactions with domestic or international companies.

So, both these services are facilitated by the bank but in a different way as per the need of seller party.

Bank Guarantee

  • Bank guarantee is a service by which bank gives a guarantee to the seller on behalf of his client for assurance of payment. 
  • So, Bank guarantee has the same function as a letter of credit but with some differences.
  • Bank guarantee generally used in domestic transactions.
  • Bank guarantee is beneficial when contractual obligations are not fulfilled by the other seller party.
  • Bank guarantee is used in infrastructure and real estate projects to reduce risk level.
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Letter of Credit V/s Bank Guarantee

BasisLetter of CreditBank Guarantee
DefinitionA letter of credit is an obligation by the bank to the seller if the criteria met, the bank will make payment.In bank guarantee, if the opposing party doesn’t fulfil contractual obligations the Bank will make payment.
BoundaryIt is used internationally.It is used domestically.
ProtectionIt protects both parties but favours exporter.It also protects both but favours buyer.
IndustryIt is used by merchants.It is used by real estate and infrastructure developer.

L/Cs are frequently used in international transactions compared with bank guarantees. When comparing the two instruments, the market for bank guarantees is much larger than that for L/Cs.