So in essence, a Letter of credit, also known as Documentary Letter Of Credit, is the bank’s obligation to pay the seller of goods or services a certain amount of money in the timely submission of documents confirming shipment of goods or performance of contractual services.

Documentary letter of credit is one of the most important means of financing in international trade, as the letter of credit is a tool that removes most of the risks as from the buyer (importer) and from the seller (exporter).

SWIFT MT799 and swift MT760

BANK GUARANTEE (BG)
A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. Note that a bank guarantee is not the same as a letter of credit. How it works/Example: Let’s assume Company XYZ is a small, relatively unknown restaurant company that would like to purchase €3 million of kitchen equipment. The equipment vendor may require Company XYZ to provide a bank guarantee in order to feel more confident that it will receive payment for the equipment it ships to Company XYZ. To obtain this bank guarantee, Company XYZ requests one from its preferred lender (usually the bank with which it keeps its cash accounts). The lender provides the guarantee in writing, which is then passed on to Company XYZ and its vendor. Company XYZ’s lender essentially becomes a co-signer on the purchase contract with the vendor.

The differences between the letters of credit and bank guarantees

1. Letter of credit is opened with the intention of using it, that is, payment by letter of credit is a phenomenon that occurs during the normal course of events (method of payment). Guarantee is used as a way to ensure obligations and is used if in the process of the implementation of one of the parties of the transaction is not able to meet its own obligations.

2. Letter of credit is used as a method of payment in one form or another. The guarantee can cover almost any kind of obligations (the advance payment guarantee, performance of contractual obligations, tender obligations, repayment, payment of customs duty, payment of a fine or compensation fixed by the court, the observance of the guarantee period of equipment, guarantee of the payment of court collateral, guarantee of payment of the transfer a football player and many others.) Area of application of guarantee, thus much wider than in credit.
3. Letter of credit is a transferable tool, as it allows to optimize the calculations between the partners. Guarantee in rare cases can be transferable as all that is required to receive funding under the guarantee is the requirement of payment, which makes it a ground for abuse of this tool.