LC vs BG: How They Differ and Which is Right for Your Business

In business, especially when large amounts of money are involved, trust is extremely crucial. Whether you’re importing goods, supplying high-value products or securing a large-scale project, you want to ensure that all parties involved honour their commitments.

In cases like these, financial instruments like Letters of Credit (LCs) and Bank Guarantees (BGs) come in. Both of these tools are designed to protect businesses in trade and project agreements, but they serve very different purposes. Understanding these differences is extremely crucial for making the right and informed choices for your transactions.

What is a Letter Of Credit?

A letter of credit is a commitment from a bank to pay a seller on behalf of a buyer as long as the seller meets the agreed-upon conditions. These conditions usually involve delivering goods and services and presenting shipping papers, invoices, inspection reports and any other required supporting documents. 

Once the conditions are fulfilled, the bank releases the payments. This is done regardless of the buyer’s financial situation at the time.

LCs are widely used in international trade where the trust between the buyer and seller is still being established, and the security of payment is critical.

What is a Bank Guarantee?

A bank guarantee, on the other hand, is a kind of guarantee or a promise from a bank to cover the losses if a customer it represents fails to make a payment, complete a project or fulfil a contract or any other obligation that is not met.

These are common in domestic trade, infrastructure contracts and government tenders, where the fulfilment of contractual commitments is the main concern.

Bank Guarantee Vs Letter of Credit

How is Risk Managed?

From the perspective of a seller, an LC is a safer choice because it shifts the risk and burden of non-payment to the bank. Once they fulfil their part of the agreement, payment is guaranteed.

With a BG, the beneficiary receives protection only if there is a failure to perform or pay. No company wants to risk a claim against their guarantee; therefore, while this offers less immediate certainty, it is a strong deterrent for non-performance.

LC vs BG- How to Choose?

Choose a Letter of Credit when

• You need assurance of payment before shipping goods.
• You are entering a new business relationship with limited trust.
• You’re involved in cross-border trade where payment delays could be costly.
  

Choose a Bank Guarantee when

• You want assurance that a project will be completed as promised.
• You need protection against financial loss if a supplier or contractor fails.
• You’re working on domestic contracts, infrastructure projects, or government tenders.

At Pacific Corp, we specialise in providing the trade finance tools that keep your supply chain moving and your business growing. Our solutions are designed to reduce risk, improve cash flow, and build trust with your trading partners

Letters of Credit – USANCE and AT SIGHT, Back-to-Back LCs

• Standby Letters of Credit (SBLC)
• Bank Guarantees (BGs) – including Performance and Advance Payment Guarantees
• Proof of Funds (POF) & Blocked Funds
• Bank Drafts & Pre-Advice Messages
• Bank Comfort Letters & Ready, Willing, and Able (RWA) Statements
  

Whether you’re securing payment for an international shipment or protecting a major project from default, our team ensures the process is smooth, compliant, and reliable.

By choosing the right instrument for the right situation and working with a trusted trade finance provider like Pacific Corp, you can safeguard your transactions, strengthen relationships and focus on the growth of your business without unnecessary financial uncertainty.