Difference Between Standby LC And Bank Guarantee

Standby Letter of Credit Vs Bank Guarantee

Difference Between Standby LC And Bank Guarantee.jpg

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 Protection - Although both of these trade finance instruments ensure that the seller gets paid on-time, there is a legal difference. Just like Standby LC, a bank guarantee protects the seller but at the same time, it also protects the buyer. While in the case of Standby LCs, only sellers are protected by the issuing bank.
Legal Difference - There is a big legal difference between a bank guarantee and a Standby LC. A bank guarantee is an obligation subject to civil law whereas a standby LC is subject to banking protocols.
Scope of Practicality - A BG 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.
Type of Payment Covered - The SBLC is considered a secondary type of payment where the bank is only responsible to release the payment if the buyer defaults and the seller fulfills its terms in the contract. In simple words, if the buyer fails to make the payment and the seller meets the mentioned criteria, the issuing bank will make the payment.