What is the difference between a bank guarantee and a letter of credit?

What is the difference between a bank guarantee and a letter of credit Introduction: The Significance of Bank Guarantees and Letters of Credit Hello everyone! In the world of global commerce, bank guarantees and letters of credit are indispensable tools. They provide assurance and security to parties involved in international transactions. While they may seem similar at first glance, there are fundamental differences that one must grasp. Let's dive in! Bank Guarantees: A Closer Look A bank guarantee is a commitment made by a financial institution on behalf of a customer. It assures the beneficiary that a certain sum of money will be paid if the customer fails to fulfill their obligations. Bank guarantees are often used in construction projects, where the contractor may need to assure the client of their performance. They can also be employed in trade scenarios, such as when a buyer wants assurance that the seller will deliver the goods as agreed. Letter of Credit: Understanding its Essence A letter of credit, on the other hand, is a payment mechanism primarily used in international trade. It involves three parties: the buyer, the seller, and the issuing bank.