Letter of Credit (LC) & Bank Guarantee (BG) in Export & Import

1️⃣ Letter of Credit (LC) 🏦

What is a Letter of Credit (LC)?

A Letter of Credit (LC) is a financial instrument issued by a bank that guarantees payment to the exporter (seller) as long as they fulfill the conditions mentioned in the LC. It minimizes the risk of non-payment in international trade.

📌 Issued By: Importer’s (Buyer’s) Bank
📌 Used By: Exporter (Seller) & Importer (Buyer)
📌 Purpose: Ensures secure payment in international transactions.

Types of Letter of Credit (LC)

🔹 Revocable LC – Can be changed/canceled without the beneficiary’s consent.
🔹 Irrevocable LC – Cannot be modified without agreement from all parties.
🔹 Confirmed LC – A second bank guarantees payment, reducing exporter risk.
🔹 Unconfirmed LC – Only the issuing bank guarantees payment.
🔹 Sight LC – Payment is made immediately after the exporter submits compliant documents.
🔹 Usance (Deferred) LC – Payment is made after a fixed credit period.
🔹 Back-to-Back LC – Used when an exporter needs to pay suppliers with an LC.
🔹 Standby LC – Acts as a financial backup, like a guarantee.
🔹 Transferable LC – Can be transferred to another party (useful for middlemen).

Key Details in a Letter of Credit (LC)

📜 LC Number & Date – Unique reference number for tracking.
📜 Issuing Bank & Beneficiary Bank – Banks involved in the transaction.
📜 Buyer (Importer) & Seller (Exporter) Details – Parties involved.
📜 Goods Description & Quantity – Product details matching the invoice.
📜 Payment Terms – Sight payment, usance payment, deferred terms, etc.
📜 Expiry Date & Place of Expiry – Deadline for LC compliance.
📜 Shipping Documents Required – Bill of Lading, Packing List, Insurance, etc.

📌 Why Exporters Prefer LC?
✅ Guaranteed Payment – Risk of non-payment is reduced.
✅ Secure Transaction – Bank verifies documents before releasing payment.
✅ Reduces Political & Credit Risk – Useful for high-value transactions.

2️⃣ Bank Guarantee (BG) 🏛️

What is a Bank Guarantee (BG)?

A Bank Guarantee (BG) is a financial assurance given by a bank to the exporter or importer, promising to cover losses if the other party fails to meet contractual obligations.

📌 Issued By: Importer’s or Exporter’s Bank
📌 Used By: Businesses in Trade & Contracts
📌 Purpose: Protects against financial risks in international trade.

Types of Bank Guarantee (BG)

🔹 Financial Guarantee – Guarantees payment in case of default.
🔹 Performance Guarantee – Ensures the seller completes the contract.
🔹 Advance Payment Guarantee – Protects the buyer if the seller fails after taking advance payment.
🔹 Bid Bond Guarantee – Used in tenders to assure commitment.
🔹 Deferred Payment Guarantee – Ensures future payments as per contract terms.

📌 Why Businesses Use BG?
✅ Enhances Credibility – Shows financial strength in international trade.
✅ Reduces Risk – Protects both buyer and seller from default.
✅ Supports Large Contracts – Useful in infrastructure, construction, and trade finance.

Difference Between Letter of Credit (LC) & Bank Guarantee (BG)

Feature Letter of Credit (LC) Bank Guarantee (BG)

Purpose Ensures exporter gets paid Ensures obligations are met

Used By Buyer (importer) & seller (exporter) Buyer, seller, contractors, service providers

Risk Covered Payment risk in trade Performance or financial risk

Bank’s Role Bank pays when documents meet LC Bank pays only if the other party defaults

conditions

Payment Timing Payment happens when conditions Payment happens only in case of default

are met

Common In International trade (exports & imports) Trade, construction, tenders, contracts

Which One Should You Use?

✅ If You’re an Exporter → Prefer an LC (ensures you get paid).
✅ If You’re an Importer → Prefer a BG (protects your payments & guarantees performance).
✅ For Large Contracts → Use Both LC & BG to safeguard transactions.