Bank Guarantee and Standby Letter of Credit

What is a Bank Guarantee (BG)?

  • A bank guarantee is like a safety net for business deals. It promises a specific payment to the beneficiary (seller or buyer) if the other party breaks the contractual obligations to ensure minimal impact on working capital.

    A bank guarantee involves three parties: buyers, sellers, and lenders (banks). It mitigates credit risks for all parties involved as it can protect the buyer or seller from loss or damage due to non-performance by the other party in a contract.

Additional support for your business

Bank Guarantee and Standby Letter of Credit are both used to reduce risk factors between borrowers and lenders in trade.

What is a Standby Letter of Credit (SBLC)?


A standby letter of credit, abbreviated as SBLC, refers to a legal document where a bank guarantees the payment of a specific amount of money to a seller if the buyer defaults on the agreement.

An SBLC acts as a safety net for the payment of a shipment of physical goods or completed service to the seller, in the event something unforeseen prevents the buyer from making the scheduled payments to the seller. In such a case, the SBLC ensures the required payments are made to the seller after fulfilment of the required obligations.

What is the difference between a Standby Letter of Credit and Bank Guarantee?

Bank Bonds and Bank Guarantees provides a purchaser the security of a guarantee if there is a failure by the seller to meet its contractual obligation. Standby Letter of Credit Operates similar to a Bank financial guarantee, with the main difference being that it is governed by the current version of UCP 600 or ISP 98.

. Scope of Usage

A Standby Letter of Credit significantly takes place in long-term contracts to provide payment security to the beneficiary as per the terms & conditions of the contract. Whereas, Bank Guarantee services are wider in scope comparatively as it is used in both long-term and short-term transactions. For example, real estate, construction projects, etc.

. Scope of Practicality

A Bank Guarantee is more practical than SBLC. The SBLC can be varied and is used for both financial and non-financial factors. The financial risk factors include on-time payment for the goods, whereas non-financial factors include the requirement of a particular material, or marginal defect, etc. While on the other hand, BG only covers financial performance such as the sale of goods, etc.

. Legal Difference

There is a legal difference between a Bank Guarantee and a Standby Letter of Credit. A Bank Guarantee is an obligation subject to civil law whereas a Standby Letter of Credit is subject to banking protocols. It can be concluded that both Bank Guarantee and Standby Letter of Credit share some similarities. Both are the legal documents from the bank to assure on-time payment to the seller in case if the buyer defaults. But there are some differences in terms of risk coverage and involvement.